If I Could Tell All Investors 1 Thing About Buying at Record Highs, It Would Be This

With the S&P 500 (SNPINDEX: ^GSPC) just a few points below its record high hit earlier this month, investors are not only understandably hesitant to continue buying stocks, but they're even a little worried about sticking with many of their current ones.

If you're one of these worriers, however, don't sweat it too much. Here's why.

A data-backed reality check

Don't misread the message. Stocks are broadly overbought and fundamentally overvalued, leaving the market positioned for at least a correction. Even if it's not in the immediate offing, it's going to happen sooner or later, and likely sooner.

Much can happen in the meantime, though, and statistically speaking, it's likely to be more bullishness you want to participate in than bearishness worth trying to avoid. And even if it's the latter, that weakness is likely to be relatively short-lived.

Image source: Getty Images.

Think about it. The fact that the market's currently near yet another record high says something very plainly -- that stocks can and do continue moving higher even after reaching those record levels. They've always done so. That doesn't mean they don't also fall back from a record from time to time. But they've recovered every time to eventually make their way back to a new record. Every. Single. Time.

But are you going to get the timing right, sidestepping the pullback whenever it materializes? Maybe. However, that's much easier said than done, which is why most investors don't do it well enough, to help themselves. In fact, most people are measurably bad at timing the market's near-term twists and turns, doing themselves more harm than good by trying.

A 2024 study done by investment research outfit DALBAR illustrates this point. Although average investors aren't outright horrible at spotting the market's peaks and troughs, they're only right a little more than half the time. And when they're wrong, they're really, really wrong. The DALBAR study points out that while the S&P 500 achieved average annual gains of 9.9% in the 20 years prior to the report being published, the typical equity investor only achieved an average gain of 5.5% during this time. Trading decisions meant to lock in gains and minimize losses ended up having the opposite effect.

Timing isn't everything

Is it possible you're right to be wary of a sizable pullback in the very near future? Sure. You're ultimately betting on how the crowd's going to feel in the immediate future, though, and guessing how people are going to feel at any point in the near future is tough to do, and impossible to do consistently. And remember, even if you get out at the right time, you then have to get back in at the right time.

The smartest way to win the market-timing game, therefore, is choosing not to play it at all, and instead buying and holding stocks on faith that their actual value will eventually shine through. That's a game you can actually win simply because there's no guessing about the crowd's future feelings. It's all ultimately about a company's quantifiable performance.

It's also a long-term game that doesn't leave room for any short-term moves.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.