All-time highs and psychological barriers to investing

economictimes.indiatimes.com:

The headline indices like the Nifty 50 and Sensex have hit fresh all-time highs (ATH), and that is the talk of the town. However, we always advise investors to just look at these as an indicator of broad trends, not fixate on these numbers and certainly ignore all the associated noise around these events. The hype around ATH can be a major deterrent to prudent investor behavior.

Let me share a few observations about ATH with all our readers. Since we are of the opinion that the investment horizon for equity investing should be at least 5 years, we divided the historical data for the Nifty 50 Index, in different 5-year buckets, since 1990. We then checked the number of trading days when the Nifty 50 hit an ATH value.

The above data is very intuitive as we know India has been a growth market and Indian equities have delivered handsome returns over the longer term. Take for example the 5-year bucket between 2016 and 2021 when the Nifty 50 hit ATH on 124 trading days. Any investor who tracks these headline numbers might be tempted to take money off the table or at the least be wary of putting in additional money.

The easiest behavior hack to counter this is to invest for longer (5+ years). Staying invested in equities has its ups and downs, but it may lead to the desired outcomes over the long term. As we can see, markets hit new all-time highs in each subsequent block of 5 years.

Thus, if one gets the market timing wrong in the short term, it can be just a matter of time before equities deliver and make up for all the waiting. Let me give some context on why equity investing may be rewarding. Equity is probably the only asset class that captures human progress and human innovation over time.