Buying at all-time highs beats waiting for the pullback.

The Dow just cleared 50K and everyone’s scared. The data since 1988 says the fear is backwards.

The Dow just hit a new all-time high above 50K, and I’m hearing the same thing everywhere: it’s too hard to buy up here, I’m worried I’m top-ticking, I need a pullback first. So let’s do the numbers.

Going back to 1988 on the S&P 500, buying at an all-time high versus buying a random day: you make about 50% more money, and you’ve got an 88% chance you’re higher a year later, versus 75 to 80% on a random day. Buying the index is a good idea in general. Buying it at an all-time high adds juice. And it compounds. Two years out it’s nearly 20% of your money.

Here’s the stat that explains why. Only about 30% of the time does an all-time high become a floor, meaning you never draw down 5% or more below that price again. Sit with that. One in three all-time highs, you’re just never 5% underwater from there. The flip side is 60% of the time you do go underwater at some point, so the win rate looks low.

Notice what that is. Low win rate, but every so often the thing just blows out and never looks back. That’s trend following. That’s buying breakouts. You’re wrong often, but the winners run forever and carry the whole thing.

And every bear market starts with a new high that fails, so yes, somebody’s always top-ticking. But new highs cluster in uptrends. That’s what an uptrend is: a new high, then another, then another. Sometimes you just hold your nose and buy.

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— Michael Nauss, CMT, CAIA, CDMS