The S&P 500 spends only 12% of the time more than 20% below its last all-time high. (Keystone)

As we've noted before, there's no reason to fear all-time highs in the stock market; the S&P 500 often sets new records highs, and only a small fraction of those record levels will turn out to be a market peak. It's somewhat counterintuitive, but buying at an all-time high does not result in lower returns.

In addition, waiting for a drop can be costly. After all, the S&P 500 trades within 5% of a record high about 60% of the time, and within 10% of an all-time high about 74% of the time, based on monthly returns since 1960. Corrections (10% + drops) tend to be short-lived, and undo only a few months of S&P 500 returns, so waiting for one requires superhuman timing. Bear markets (20%+ drops) are more destructive—giving investors a 'time machine' to invest at prices last available years ago—but they are also incredibly rare. The S&P 500 spends only 12% of the time more than 20% below its last all-time high, and these episodes are years apart from one another.

New money, new problems?

There's another issue at play here. When an investor asks "how should I put this new money to work?" it is emblematic of a behavioral bias called "mental accounting." Mental accounting reflects our tendency to categorize money into arbitrary groups—in this case, treating "new" money differently than "old" money. Even investors that have already decided on an investment strategy will sometimes wonder whether they should use a portfolio addition to make a change to the strategy—or whether those funds should be allocated to a new strategy altogether.

Instead, we recommend viewing the portfolio holistically. Portfolio contributions are useful because they aid "tax-free rebalancing," by adding to parts of the portfolio whose allocations have drifted lower due to underperformance. Once an overall investment strategy is set, most other decisions should be on 'auto-pilot' (based on an agreed-upon plan) in order to minimize behavioral risks. See The self-driving portfolio for more information.

For more, read Another all-time high. Time to stop adding to stocks? 3 October 2018.