The best time to invest in stocks is when blood is running on the street. Or to put it another way bear markets are great time to pick up quality names at cheap prices. While everything is falling day after day it takes courage to jump into the waters. While buying stocks when prices are low is a great strategy what about investing when prices are at their peaks. Putting cash into equity markets during peaks of bull markets is also not easy as there is always the fear of when stock would reverse course. Currently US equity markets are in a multi-year bull market. Many stocks at trading at their peaks and certain areas of the equity markets looks frothy. In the current market condition, companies with very low revenues and even tiny profits are worth billions. So does it make sense to buy stocks now?

According to an article by Scott Krauthamer at Alliance Bernstein, periodic investing at market peaks can also yield decent positive returns especially over the long run. From the piece:

High Valuations Don’t Always End in Disaster

For many investors, elevated valuations are an obstacle to deploying cash today—particularly in US stocks, which climbed to new record highs in early February. However, our research suggests that equities have delivered solid returns over time, even for investors who entered the market when stocks looked relatively expensive.

In fact, since 1950, the S&P 500 has been at or near record highs in 43% of all months (Display). And if you invested equal amounts at each market peak, US stocks would have delivered average annual returns of 9.6%. That’s 1.9% lower than the returns generated by investing at each bear market bottom, but a solid outcome over time, in our view.

High valuations don’t always end in disaster. But today’s valuations have been shaped by unusual market trends, adding concerns for investors. Rising price/earnings valuations of US stocks have been driven mostly by a surge in share prices, not by earnings growth. In other words, investors have pushed up share prices in anticipation that a global growth recovery will fuel a rebound in corporate earnings.

That’s a tall order. We believe earnings are unlikely to rise simultaneously across the market, given uncertainties about how countries will emerge from the pandemic, the pace of economic recovery and business challenges in many industries. So, investing in exchange- traded funds (ETFs) to gain passive, low-cost market exposure may not be the best way to redeploy cash to capture recovery potential.

Source: Cold Cash? How to Redeploy in Hot Markets, Alliance Bernstein

You may also the below related post:

• What If You Only Invested at Market Peaks?: Video

Related ETF:

• SPDR S&P 500 ETF (SPY)

Disclosure: No positions

Diversification is one of the simplest ways to be successful in equity investing. Diversification can take many forms. For example, one can hold a mix of stocks, bonds, gold, real estate and cash. Or it is possible to diversify across many types of equities such as domestic and foreign or emerging, developed and frontier markets. The key is to pick a strategy that best works for each of us. Recently I came across an excellent Vanguard research study that discussed the importance of  diversification.

According to the study, broad market diversification cannot insure against losses but it can help reduce necessary large losses. During the 2008-09 Global Financial Crisis, the S&P 500 fell 37%. However many stocks in the index declined much more than that. Some even plunged by over 50%. Some of the companies that crashed heavily were thought of blue-chip dividend payers before. Most of these were in the financial sector. The following table shows how much losses these stocks had during that time. A portfolio heavy in this sector would have performed very poorly. On the other hand, there were also many stocks that generated strong returns in that awful year. Some of these were the best performers in the index.

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Source: Vanguard’s Principles for Investing Success, Vanguard

So the key takeaway is that broad diversification cannot totally avoid losses. But it can help avoid unnecessarily large losses. In the above scenario, an investor holding an S&P 500 index fund or a basket of stocks in different industries would have done relatively very well compared to an investor with a high concentration in financial services. So even a total wipeout of disasters like Lehman Brothers would be offset by other strong stocks.

Related ETF:

• SPDR S&P 500 ETF (SPY)

Disclosure: No Positions