How to Invest When Markets Seem Expensive

The Perennial Anxiety of Investing at Market Highs

Every generation of investors faces the same anxiety: "Is now a good time to invest? Markets seem expensive." The question has been asked at S&P 500 levels of 1,000, 2,000, 3,000, and 5,000 — and by investors who paused at each of those levels and waited for a better entry point, only to watch markets continue upward.

This is not to say that markets cannot fall — they do, regularly and sometimes dramatically. The question is whether attempting to time the market, by waiting for prices to be more attractive, is a reliable strategy for improving long-term outcomes. The evidence is consistently discouraging for market timers.

This guide covers the psychology and evidence around investing at market highs, the valuation tools available to assess whether markets are genuinely expensive, and practical approaches for investors navigating this challenge with real money.

The Evidence on Market Timing

Markets at All-Time Highs Are Not Followed by Crashes

A widely held belief is that markets at or near all-time highs are at elevated risk of correction. The data does not strongly support this.

Analysis of US stock market history shows that investing at all-time highs has, on average, produced returns no worse — and often somewhat better — than investing at arbitrary non-high levels. This is because all-time highs occur frequently (markets trend upward over time; a market that has grown will regularly make new highs), and a new high is simply evidence that the long-term trend is intact.

The famous study from Vanguard (2012, updated subsequently) found that immediate lump sum investing outperformed pound-cost averaging in approximately two-thirds of 12-month historical periods, and outperformed over three-quarters of 3-year periods. The main reason: money invested sooner earns the market return for longer. Cash sitting on the sidelines earns less, on average, than a portfolio in the market.

"Time in the Market" vs "Timing the Market"

The aphorism "time in the market beats timing the market" is backed by substantial academic and empirical evidence. Research consistently shows that:

• Missing the best days is catastrophic for returns. The best market days cluster around the most volatile periods — often near market bottoms. An investor who is out of the market during these periods misses the most powerful recovery rallies.
• Market timing requires being right twice — both when to sell (before a fall) and when to buy back (at or near the bottom). Most investors who exit markets in anticipation of a correction hold cash too long and miss the recovery.
• Cash drag is real. Holding cash while waiting for better prices incurs an opportunity cost — the return foregone on capital not invested. In an environment where markets return 7–9% per annum over long periods, a year of cash earns dramatically less, permanently reducing the terminal portfolio value.

None of this means markets cannot or will not fall. They will. The question is whether the investor's ability to time the fall and re-entry consistently is sufficiently reliable to overcome the statistical drag of being out of the market. The evidence says it is not.

Valuation Frameworks: What Can We Know?

While short-term market timing is unreliable, long-term return expectations do have an empirical basis in valuation. The most widely used framework is the CAPE ratio.

The CAPE Ratio (Cyclically Adjusted P/E)

Developed by Nobel laureate Robert Shiller of Yale, the CAPE (also called the Shiller P/E) divides the current price of an index by the average real (inflation-adjusted) earnings over the previous ten years. Averaging earnings over a decade smooths out cyclical distortions — during a recession, earnings are temporarily depressed, making simple P/E look high; during a boom, earnings are temporarily elevated, making simple P/E look low. The CAPE provides a more stable measure of underlying valuation.

Historical observations:

• When CAPE has been very low (below 10) — as in the early 1980s — forward 10-year returns have historically been very strong.
• When CAPE has been very high (above 30) — as in the late 1990s tech bubble and again in 2021-2022 — forward 10-year returns have historically been below average.
• The US S&P 500 CAPE has, as of 2026, been elevated relative to its long-run average (which is approximately 17) for many years, partly reflecting structural changes in US corporate profitability, the dominance of asset-light technology businesses, and low interest rates.

The CAPE's limitations:

• It is a poor short-term timing tool. Markets remained at high CAPE valuations for most of the 1990s while continuing to rise strongly.
• The "right" CAPE level may have shifted. In a lower interest rate environment (even with rates higher than 2020-21 lows), higher equity valuations may be structurally justified.
• CAPE varies dramatically by geography: non-US markets (Europe, UK, Japan, EM) have often traded at lower CAPE levels, partly reflecting different sector composition and profitability levels. A global investor diversified across geographies is not solely exposed to US CAPE.

Other Valuation Metrics

Price-to-Book (P/B): Compares market capitalisation to book value of assets. Less useful in a world dominated by intangible-asset businesses (technology, pharma, financial services) where book value understates economic value.

Dividend yield: The yield on an index is the inverse of a valuation metric — a lower yield implies a higher price per unit of income. The US market's yield of approximately 1.2–1.5% (as of 2026) is historically low, reflecting both price appreciation and a shift away from dividends toward buybacks as the primary return-of-capital mechanism. UK and European markets yield more, partly reflecting different capital allocation cultures.

Earnings yield spread: The earnings yield (inverse of P/E) minus the risk-free rate (government bond yield) measures the equity risk premium — the additional return equities offer above bonds. In the 2022-2026 period, rising bond yields have compressed the equity risk premium, making equities look less attractive on a relative basis than during the zero-rate period. This is a more relevant signal than the absolute P/E level.

Practical Strategies for Investing a Lump Sum

Option 1: Invest Immediately

The statistically optimal choice in most historical scenarios. If markets are fairly valued or undervalued, the benefit is obvious. Even if markets are somewhat expensive, the benefit of time in the market typically outweighs the modest timing advantage from waiting.

Psychologically, this is the hardest option for investors who have not recently held market risk — particularly those investing a large windfall (inheritance, property sale, business exit). The risk of a market fall shortly after investing, even if recovered over years, can cause significant anxiety.

Option 2: Pound-Cost Averaging Over 6–12 Months

Divide the lump sum into 6 or 12 equal monthly tranches and invest one tranche per month. Hold the waiting tranches in a money market fund or short-dated government bond fund (earning a return while waiting, rather than leaving cash idle).

Advantages: Reduces anxiety around timing; provides natural diversification of entry price; psychologically sustainable.

Disadvantages: Statistically, in a rising market (the most common scenario), the uninvested portion drags on returns. If markets fall during the averaging period, the investor is partly protected — but they must then commit to investing the remaining tranches at lower prices (which many investors psychologically struggle to do, reversing the intended benefit).

Option 3: Strategic Allocation — Core and Satellite

Invest the majority (e.g., 75%) as a lump sum in core, globally diversified positions (which are not particularly market-timing sensitive) while holding the remainder for selective deployment into specific opportunities — individual markets trading at lower valuations, upcoming event-driven situations, or waiting for a specific asset class correction.

Option 4: Phased Sector Allocation

Rather than timing the overall market, focus on valuations across markets and sectors. In a world where the US S&P 500 CAPE is elevated, European or emerging market valuations may be more attractive. Rather than holding cash while waiting for the S&P to become cheaper, invest in markets that offer better value on current metrics.

This requires conviction and rebalancing discipline as value opportunities materialise, but it is a more investment-grounded approach than simply holding cash.

The Importance of Asset Allocation Over Market Timing

Academic research consistently shows that asset allocation — the split between equities, bonds, alternatives, and cash — drives the vast majority (often cited as 90%+) of long-term portfolio return variability, while market timing and individual security selection contribute relatively little.

This means that the energy spent worrying about whether to invest now or wait would be far better directed toward getting the asset allocation right:

• What equity/bond split matches your time horizon and risk tolerance?
• Which geographies offer the best long-term return expectations?
• What is the appropriate role for real assets and alternatives?
• What is your income requirement, and how does that affect asset mix?

These questions have evidence-based answers. The question "should I wait for markets to fall before investing?" does not.

When Caution Is Appropriate

This guide is not an argument for ignoring all risk. There are genuine scenarios where a more cautious initial allocation is appropriate:

• Short time horizon: An investor who may need to access the capital within 2–3 years should not be 100% in equities regardless of valuation. The risk of a major drawdown not recovered within the investment horizon is real and should be reflected in asset allocation.

• Extreme valuations by multiple metrics: When multiple valuation measures (CAPE, P/B, earnings yield spread relative to history) simultaneously signal markets well above historical norms, reducing equity exposure somewhat in favour of shorter-duration bonds, real assets, or alternatives is a reasonable risk management response — not as a market timing call but as an asset allocation discipline.

• Personal circumstances: An investor who has just sold their business and has no other income source should hold a larger liquidity buffer and may appropriately invest more gradually.

Holding Cash During the Averaging Period

Investors who choose to phase their investment over several months should not hold the waiting cash in current accounts earning little or no interest. Options include:

• Money market UCITS funds: Daily liquidity, very low risk, competitive short-term returns. iShares, Invesco, and other providers offer sterling, USD, and EUR money market UCITS.
• Short-dated government bond funds: 0–3 year gilts or Treasuries. Slightly more volatile but higher yield than pure money market.
• Fixed-term deposits with regulated banks: For larger sums, fixed terms of 1–3 months can provide an incremental yield improvement.

The goal is to earn a return on waiting capital rather than earning zero in a current account — in an environment where short-term rates have been 4–5%, this is meaningful.

How Global Investments Can Help

The anxiety of investing a large sum is real and legitimate — but the decision about when and how to invest should be informed by evidence, not managed by fear. At Global Investments, we work with internationally mobile clients to build investment plans that take account of their specific timing concerns, tax position, time horizon, and income needs.

Whether you are investing a lump sum from a property sale, a business exit, an inheritance, or accumulated cash savings, we can help you construct a plan that balances the statistical case for prompt investment with the psychological and practical realities of your situation.

To discuss your investment plan, contact our advisory team for an initial consultation.

Capital is at risk. The value of investments and income from them can fall as well as rise, and you may get back less than you invest. Past market performance and historical return data are not reliable indicators of future results. This article is for information purposes only and does not constitute personalised financial advice.