After breaching 3,000 intraday for the first time on Wednesday, the S&P 500 finally closed above this milestone on Friday. But while investors are likely pleased with their equity market returns so far this year, many may also now be worried about staying invested with the market at an all-time high.
We all know how bad it could be—an investor who bought in at the 2007 peak would have suffered a roughly 50% drawdown by the 2009 trough. But most of the time investors have not been so unlucky. So what exactly is the risk of a drawdown after buying into the market?
Based on monthly total return data on the S&P 500 since 1945, the risk does not appear as high as one might think. Assuming an investor bought in at a random point in time:
* In 28% of cases, an investor would at no future point have seen their investment (including dividends) trade in the red.
* In 50% of cases, an investor would at no future point have seen their investment (including dividends) suffer a drawdown greater than 5%.
* In just 22% of instances would an investor have suffered a "bear market" of greater than 20% falls in their own portfolio value.Of course, today is not a random time; we're at an all-time high. So we have also zoomed in on the one-third of the time when the market is trading at a (total return) all-time high, and analyzed the subsequent returns from there. Perhaps surprisingly, an investor's odds from all-time highs would have been better.
* In 34% of cases after buying in at an all-time high, an investor would at no point have seen their investment (including dividends) trade in the red.
* In 59% of cases after buying in at an all-time high, an investor would at no future point have seen their investment (including dividends) suffer a greater than 5% drawdown.
* In just 15% of instances after buying in at an all-time high would an investor have subsequently suffered a "bear market" of greater than 20% falls in their investment value.This sounds counterintuitive. But investors should remember that, for every 2000 and 2007 when buying in at all-time highs subsequently turns out to have been a bad idea, there were many more 1982s, 1992s, 1995s, 2013s, and 2016s, when investors were subsequently richly rewarded for taking a leap of faith.
Investors would have even further reduced their risk of drawdowns by investing in balanced portfolios. Considering a 60–40 portfolio of US large-cap equity and US government bonds since 1945:
* In 35% of cases, an investor would at no future point have seen their investment (including dividends and coupons) trade in the red.
* In 68% of cases, an investor would at no future point have seen their investment (including dividends) suffer a greater than 5% drawdown.
* In just 5% of instances would an investor have suffered a "bear market" of greater than 20% falls in their portfolio value, and it would never have exceeded 30%.For details on these numbers and more, click here.