1:15

Hello and welcome back to the Canadian Money Roadmap

1:17

podcast . I'm your host

1:19

, evan Neville . On

1:23

today's episode , I'm going to be answering the question

1:25

of should you be investing in stocks when

1:28

the market is at an all-time high ? I got

1:30

this question a few times recently

1:32

, and so I thought I'd break down a few of the things

1:34

that I think about when answering this question . There's

1:37

a few numbers and percentages and all sorts

1:39

of things in the answer here

1:41

, so I'm breaking this into two parts

1:43

, and so this is part one of answering

1:46

the question should you invest when the market

1:48

is at all-time highs ? When

1:55

the new year rolls around and everybody has their new TFSA

1:58

contribution room , a lot of people start

2:00

asking this question . I've seen it online

2:02

. I got this question from existing clients

2:04

and it's fair , especially after

2:06

looking at a great year for

2:08

the stock market , like we saw last year , especially

2:10

in the US . I know a lot of you listening and a lot

2:13

of my clients would have more of their

2:15

money invested in US stocks than Canadian

2:17

stocks or international as well , and

2:19

so if the S&P 500

2:21

is close to all-time highs , the

2:24

question inevitably comes up , and this has happened

2:26

before , not just right now , but it comes

2:28

up all the time . If the stock market is

2:30

at an all-time high , should I wait

2:32

to make a new investment just

2:34

in case it crashes now that

2:36

it's at an all-time high ? There's a few things

2:38

to break down in there and perhaps a few

2:41

misconceptions , so I'm going

2:43

to chop this up into a few

2:45

different sections and in this

2:47

week's episode I'm going to look

2:49

at some data that tell us

2:51

what has happened in the past

2:53

, and next week I'm going

2:55

to talk about valuation and how that might

2:57

be different than understanding just

2:59

the price level of

3:02

any sort of investing index

3:04

or anything like that . Okay

3:07

, so let's get into this . So currently , our

3:09

price is actually at all-time highs . That's

3:11

a fair question to ask . If I'm looking today

3:13

at the S&P 500 , it's

3:15

pretty darn close actually . So last year

3:17

was pretty good , 2022 was

3:19

pretty rough , and so the last time

3:21

we saw an all-time high for the

3:23

S&P 500 was back at the end

3:25

of 2021 . We're looking at

3:27

Canadian stocks . We're not quite there yet , but

3:30

it's not too far off , so the question probably

3:32

remains . For stocks in

3:34

general , yes , returns were good broadly

3:37

speaking around the world last year . A

3:39

few anomalies here and there , I guess , but some

3:41

markets were great , some were poor , but almost

3:44

universally back in 2022 , things

3:46

were pretty rough , so we're kind of making up for

3:48

a previous year there , and

3:51

so pretty much any pure stock index

3:53

that you look at has this kind of deep V . That

3:56

happened 22 , 23 , and

3:58

here we are now . So we're either approaching or

4:00

at all-time highs for most stock

4:03

indexes that the average person is going to be taking

4:05

a look at . You can look at the US , canada

4:07

, japan , germany . They're

4:10

all pretty well close to their

4:12

respective all-time highs . So

4:14

, yes , this is a fair question to ask , given where

4:16

things are right now . So , number two why does that make

4:18

some people nervous ? Well , the fear

4:20

is that if prices are at all-time

4:23

highs , they're more likely to drop . The

4:26

idea that stock prices

4:28

reflect some sort of cliff that

4:30

eventually happens . No one

4:32

wants to invest money if they think they're going to lose

4:35

money , and so if an all-time

4:37

high represents an impending

4:39

collapse , then this sounds

4:41

reasonable . So a fewPodcast countries have chosen to pop now a Franz 레�о jog toาน LED speakers back

4:43

to London . When I answer this question

4:45

, or I take a look at this , I want to

4:47

base my decision on data

4:49

and good data , and

4:52

an abundance of it , so that I'm

4:55

blindly doing one thing

4:57

or the other . So I would like to

4:59

take a little bit of a closer look at what the data

5:02

tell us . So I'm going to get this information

5:04

from Dimensional . I've talked

5:06

about Dimensional on the podcast before , but they

5:08

are kind of the pioneers of evidence-based

5:11

investing and they put out some really

5:13

great research on various

5:15

investing topics and this was one of them from last

5:17

year . So their title

5:20

for this bit of research . They said why a stock

5:22

peak isn't a cliff , and

5:24

what they did was they said okay , well , let's

5:26

take a look at what performance

5:28

has been on a one , three

5:30

and five-year basis after the

5:32

stock market had reached a previous all-time

5:35

high . So they looked at the S&P 500

5:37

and they looked at the monthly

5:39

closing level , so

5:41

whatever the price was at the end of the month between

5:44

1926 and

5:47

2022 . So

5:49

we've got over a thousand months within

5:52

that period of time to evaluate

5:55

. And so when they looked at the price

5:57

levels during those near 100-year

5:59

period of time , they found that

6:02

30% of those months

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were new highs . So

6:06

what they did from there is you

6:08

can take a look at what the returns

6:11

are after those periods

6:13

of time . But also when

6:15

you have a large data set like that you

6:18

can find out what the returns are for

6:20

a random month or the average

6:22

of any month throughout the entire

6:25

period . So this was really interesting

6:27

. So they found that 30%

6:29

of the months were

6:32

at all-time highs . So this is very

6:34

common . Okay , this isn't

6:36

a you know odd event , but

6:38

that also makes sense . They kind of add this at the end of

6:40

the research here

6:42

, and I'm just going to read it verbatim , because they nailed

6:44

it it says that stocks are

6:46

priced to deliver a positive expected

6:49

return for investors every day . So

6:51

reaching record highs with some regularity

6:53

is exactly the outcome one would expect

6:56

. This makes good sense

6:58

, right ? If the stock market

7:00

represents what the average investor

7:02

or the collective of investors have deemed

7:04

to be the fair price for businesses that are

7:06

growing and selling and producing things

7:08

, there is an expected return

7:11

for these types of things , and so

7:13

if there's an expected positive return for

7:15

it , they've got to be at all-time

7:17

highs relatively frequently . So

7:19

, without getting into too much theory here , let's hop back

7:22

into the numbers . So let's just look at

7:24

the months that ended

7:26

at a record high . Now

7:28

, for those of you that are just listening to the podcast

7:31

, I'm going to have a YouTube video

7:33

where you can see this graph . So if you're a bit more

7:35

of a visual learner , hop over to YouTube and you

7:37

can find the video with a similar title

7:39

here and I'll be walking through it so you can see the

7:42

graph a little bit better . But for the months

7:44

that ended at a record high , one

7:46

year later the average return

7:48

one year after the market was at an

7:50

all-time high 13.7%

7:53

. That is

7:55

pretty darn good . And then three years

7:57

later , 10.6% . Five

8:00

years later , 10.2% . Small

8:03

caveat here that these are not any

8:05

sort of ETFs or investment that you can actually

8:07

buy , but this is just the return of the index

8:09

. Yeah , you can buy index funds that are

8:11

getting pretty close , but it's just worth throwing

8:13

the little disclaimer in there . But for one year

8:16

performance 13.7%

8:18

. After One year

8:21

of an all-time high . That is nearly

8:23

double what you would expect in

8:25

a given year , especially on a go-forward

8:27

basis . Again , here's my another little

8:29

caveat . But past performance is not a guarantee

8:32

of the future results . But after a hundred

8:34

years we've got enough information here

8:36

that tells us something , right

8:38

? So let's talk about the months that

8:40

ended at any level , not just

8:42

the ones that Ended at an

8:44

all-time high . So for a random

8:47

period of time or a random starting

8:49

point . One year later , the

8:51

average return was actually only 12.4

8:54

percent . So on a really short-term basis

8:56

, historically speaking , only your

8:58

Returns have been higher

9:00

when investing at all-time highs

9:03

than any other random month . Not

9:05

exactly what one would expect . If you're

9:07

asking the question of should I wait to

9:10

invest after the stock market's an all-time high , this

9:12

might point to a little anomaly called

9:14

momentum , the momentum factor , where stocks

9:17

will kind of continue going in an upward

9:19

trajectory . Perhaps it's

9:22

because of enthusiasm or Excitement

9:25

or things like that , but there's , there's a momentum

9:27

factor that comes into play a little bit . That

9:29

is really hard to quantify from an academic level

9:31

, so maybe this is part of momentum coming into

9:33

play here . So again , any

9:35

month throughout this period

9:37

of time , three years later , 10.7

9:40

percent and five years later , 10.3

9:43

and these are each 0.1

9:46

percent higher than the returns

9:49

that we've seen in the past . For

9:51

the months that ended at an all-time high , again

9:53

those were 10.6 and 10.2 respectively

9:55

. This is not a meaningful

9:57

difference of 0.1 percent

10:00

over five years or three years to

10:02

make any sort of decision based on timing

10:04

. Right , if we're seeing that five years

10:06

later you're more likely to have lost

10:09

money Versus a random month

10:11

where you would have gained 10.0 percent , it's

10:13

like , okay , there's , there's something here . Right

10:15

, there's , there's a potential market timing

10:18

Opportunity here , but the data

10:20

does not show that . Okay

10:22

, so when ? If you're just looking at average

10:25

returns , like we did , they've been objectively

10:28

great , even when investing at

10:30

all-time highs . But in terms of the number

10:32

of times they were up , so

10:35

a year later after being

10:37

at an all-time high , 81% of the time

10:39

a year later , it's positive again , and 86%

10:42

of the time after five years , okay

10:44

, this is not a coin toss , this is just

10:47

what it has been . Again , it's not a guarantee

10:49

and it's not a hundred percent , but it's

10:51

pretty good . My belief would be

10:53

that the data does not

10:55

actually point to any sort of Market

10:58

timing strategy that you could

11:00

be employing here , by waiting it out after

11:02

the market hits an all-time high or anything like that

11:04

. So my conclusion is

11:06

that , well , there's always a chance of the stock market could

11:08

decline immediately after you make an investment . It

11:11

could definitely happen , doesn't matter where

11:13

the price level is . The data Do not

11:15

support the idea that a stock market high

11:17

is a predictor of an impending crash or

11:19

a ceiling on potential returns or

11:21

anything like that . So , as a result , I

11:24

do not recommend that people try to time when

11:26

they make new purchases based on the current level

11:28

of their respective benchmark

11:31

. So maybe that's the S&P 500 . Maybe

11:33

that's the TSX , maybe that's something else

11:35

. Side note if the S&P 500 is

11:37

at an all-time high but you're a bond investor

11:39

, or if you're looking at Canadian stocks

11:41

only and you're trying to do some sort of market

11:43

timing thing based on this , you're comparing different things

11:45

anyways , and this is kind of a moot point . This

11:48

is something that I see all the time . So for someone

11:50

that says , well , the stock market's at an all-time high

11:52

, but half their portfolio is planning

11:54

to be in bonds even if this were

11:56

true , you need to look at a broader

11:59

data set that includes something about bonds , but

12:01

that's not what the data says anyway , so we can thoroughly

12:04

ignore that . So what I hopefully

12:06

have summarized here is that

12:09

, yes , it's reasonable to think

12:11

that , potentially , the market

12:13

could decline after reaching

12:15

an all-time high , but if we use history

12:17

as a guide , the data does not

12:20

support that idea at

12:22

all . So if you are waiting to

12:24

make your new TFSA purchase , I

12:26

would say do that at your own risk , because

12:29

making a TFSA contribution at the beginning

12:31

of the year likely means that you've already maximized

12:34

your contributions there and the value that

12:36

you get from investing in a TFSA is the

12:38

longest time in the market to

12:40

eliminate taxes on investment

12:43

growth . The sooner you can get your money in there

12:45

, the more likely your odds of

12:47

success actually are over a long

12:49

enough period of time . So this

12:51

episode I just took a look at what

12:53

the returns have been and how

12:55

often they are positive , based on

12:58

the market being at an all-time high

13:00

. What I didn't talk about here

13:02

at all is whether an

13:04

all-time high is actually reflective

13:06

of anything . An all-time high

13:09

does not mean that stocks

13:11

are expensive , and an

13:13

all-time high does not signal any

13:15

sort of trouble . The price

13:17

of a stock is not necessarily

13:20

reflective of the valuation . We have to

13:22

look at something else . So it's price relative

13:24

to something else , and so

13:26

that'll be part two next

13:28

week of another way that we could take

13:31

a look at investing at all-time highs

13:33

from the perspective of looking at

13:35

valuation . Thanks so much for listening

13:38

to this episode and we will see you next

13:40

week with part two of this series

13:42

on investing at all-time highs . Thanks

13:45

for listening to this episode of the Canadian

13:47

Money Roadmap Podcast . Any

13:50

rates of return or investments discussed are

13:52

historical or hypothetical and are

13:54

intended to be used for educational purposes

13:56

only . You should always consult

13:58

with your financial , legal and tax

14:00

advisors before making changes to your financial

14:03

plan . Evan

14:05

Neufeld is a certified financial planner and

14:07

registered investment fund advisor . Mutual

14:09

funds and ETFs are provided by Sterling

14:12

Mutuals Inc .