CIO show the risk that an investor would have faced significant losses when buying the S&P 500 in any random month since December 1945. (ddp)

Record highs remind us of market peaks, and we have learned the hard way that market peaks often precede large and painful drawdowns; investors buying at the 2007 peak suffered a 50% loss by the time the market reached its low in 2009, and last year stocks suffered a 30% drawdown in just a few weeks.


Remembering these losses can make us feel anxious about investing at record highs, giving us pause about putting excess cash to work. Are these feelings rational? Should we wait for a pullback, or buy anyway?


To help answer these questions, we looked at monthly market returns going back to December 1945 to see how often the market has suffered losses (“drawdowns”) of different magnitudes.


We show the risk that an investor would have faced significant losses when buying the S&P 500 in any random month since December 1945.


Right away, we find that the risk of buying stocks has been lower than we might have thought.


  • In 28% of cases, investors would have never seen a loss on their investment.
  • In 50% of cases, investors would have never seen a greater-than-5% loss from that point.
  • In just 22% of instances, investors would have seen a greater-than-20% "bear market" decline from the point of their monthly investment.

What are the risks when buying at an all-time high?

Fig. 1 helps us to set expectations for the overall risk of investing in the stock market, but what about all-time highs? As we mentioned before, all-time highs can often feel like a poor time to invest, either because it seems the market is pricing in all the good news or because it seems to be overlooking risks.


In Fig. 2, we look at drawdowns after S&P 500 all-time highs (more common than you might think, occurring in 33% of all monthly closes since December 1945).


Perhaps surprisingly, an investor's odds from an all-time high would have been even better:


  • 34% of the time, investors buying at an all-time high would never have seen a loss on that investment.
  • In 59% of cases, investors buying at an all-time high would never have seen a loss of more than 5% from that point.
  • In just 15% of instances, investors buying at an all-time high would have subsequently suffered a "bear market" drawdown (a greater-than-20% loss) from that point.

What about a balanced portfolio?

In our earlier charts, we looked at investors putting cash to work only in the S&P 500. For investors with balanced portfolios, the risk of drawdowns has been decidedly lower, making it even more valuable to put excess cash to work straight away.


Fig. 3 shows the historical chance of losses for a 60%stock, 40% bond balanced portfolio; as you can see, the diversification benefits of a balanced portfolio significantly reduced the risk of bad timing.


  • In 35% of cases, investors' balanced portfolio investment would never have traded in the red.
  • In 68% of cases, the balanced portfolio would never have seen a greater-than-5% drawdown.
  • Only 5% of balanced portfolio investments would have been followed by a greater-than-20% "bear market" drawdown from that point—and the portfolio would never have seen any losses greater than 30% on a monthly closing basis.

Conclusion and next steps

Although large losses are memorable (even traumatic, sometimes), we often overestimate the risk of buying right at the peak, and our fear of losses can lead us to the costly decision of holding excess cash with the hope of a better buying opportunity.


We recommend that you set up direct deposits and an automatic investment process so that your usual monthly savings go directly into the market.


However, you may want to take a slightly different approach for large lump sum deposits, where the risk of bad timing is likely to be greater—and more consequential. If you have a large hoard of cash to put to work, you may want to employ a dollar-cost averaging approach to manage the risk of poor timing. In our report Three ways to invest your lump sum , we outline strategies to help you balance the risk of bad timing against the opportunity cost of missing out on market gains.


Main contributors - Kiran Ganesh, Justin Waring


Content is a product of the Chief Investment Office (CIO).


Original report - Are losses more likely after a record high?, 13 September 2021.