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I often get questions about whether it’s a good time to invest when the markets are reaching new highs. Look at the illustration of the S&P 500 below  from Dimensional Fund Advisors. On average, when the market closes at a monthly high, it is even higher over 80% of the time in the next one,three,and five years. What is particularly interesting is that the number is almost the same as if the index did not hit a new high.

This interesting slide that I just received from J.P. Morgan was a good reminder of the role that market volatility plays in achieving long term investment goals. The red dot shows the largest decline in any year and the gray bar where the year ended. The average inter year decline since 1980 was 13.8%. The most amazing one to me is 1987 where it was down 34% and ended up 2% for the year.

Margin balances, the money that investors borrow to buy securities, had reached $652 billion by the end of August. That's roughly one year after the first time they exceeded $600 billion. Except in very rare circumstances, I can't see any reason for investors to use borrowed money to buy stocks. This not only applies to stocks but to all sorts of financial instruments, particularly variable insurance products and illiquid holdings such as limited partnerships.