Should you invest right now? Talk about a tough question. There is no one correct answer to the question of when to invest in the market because the answer depends on many variables. But the short answer is that historical data tells us that if you have money to invest, now is as good a time as any as long as your time horizon is long enough to take on investment risk.
I don’t want to invest now because the market is too high. I’m afraid that a correction is coming and that hurts my chances for long-term returns.
Ok, I hear you. Because the market is high, valuations are high and we have had one hell of a run, you are reluctant to invest right now. But that does not necessarily mean that going forward you won’t earn a nice return on risky assets.
Consider this: If you invested in the S&P 500 in October 2007, your market timing couldn’t have been much worse. But if you held on until the end of 2017 you would have earned an annualized return of over 7%. Don’t Quit Your Day Job (dqydj.com) has a cool calculator that lets you play with investment timing and returns and run the numbers yourself.
Remember in this example your timing was really, really bad. You invested at a market peak just about one year before four out of the top five worst daily returns EVER for the S&P 500. This included days with losses of:
9.03% on 10/15/08
8.93% on 12/01/08
8.81% on 9/29/08
7.62% on 10/09/08
In 2008 things just continued getting worse as you probably remember. It was so bad that nine of the 15 worst performing days for the index occurred that year. On Wikipedia you can view the best and worst returns for the index:
I’m not trying to make you feel bad, but again, your lump sum timing was really, really terrible, and yet you still would have seen a nice return.
Are you getting the point? Despite having invested at the worst possible time, you were still able to earn over a 7% return through the end of 2017. The way things are going in 2018 will make this return number look even better.
But how do I find the discipline to ride out market downturns?
While this sounds great, there is an important caveat we must discuss. For you to have received this return you would have needed an iron stomach.
It would have been immensely difficult not to sell on some of those terrible down days and every other day you viewed your portfolio down hundreds, thousands or hundreds of thousands of dollars from where you started.
Of course the more you learn about investing, the more you realize that holding on during the downturns and not trying to time markets is exactly what allows you to receive the higher returns that equities offer. How long you hold on matters, Samantha Azzarello and Ainsley E. Woolridge, writing for J.P. Morgan Asset Management, offer some great insights into how your holding period impacts investment returns:
Isn’t there a way to smooth out market ups and downs?
You should also consider that if you are investing right now it’s likely and prudent that you aren’t just investing in the S&P 500. If you are you should consider talking with an investment advisor.
Odds are you are investing in a diversified portfolio that includes U.S., international, and emerging market stocks; real estate investment trusts, government, corporate, international and emerging market bonds, and maybe some commodities. This diversified portfolio will have a lower volatility than a stock index so your lows won’t be as low, hopefully allowing you to hold on for better times.
OK I am willing to invest, but should I start small or put everything in at once?
Another tough question. For this one I am going to rely on The Vanguard Group, Malvern, Pa. based investment advisor and the world’s the largest provider of mutual funds, to answer this question.
Vanguard has a great research paper on this topic by Anatoly Shtekhman, CFA; Christos Tasopoulos; and Brian Wimmer, CFA. They found that if you invested in a lump sum vs. buying a fixed dollar amount of a particular investment on a regular schedule, the lump-sum approach outperformed two-thirds of the time.
However, if you are the type of person who makes emotional decisions and you are more concerned with feelings of regret, then serial investing may be the better choice.
My crystal ball is forever fuzzy so I cannot tell you if we are at the top and on the verge of a brutal bear market, or if we are years away from the next serious economic and stock market downturn, with another 50% upside ahead.
What I can tell you is that if you invest in a diversified portfolio, are willing and able to invest over long time periods, and can control your emotions, you will likely earn a higher return than you can anywhere else on earth… except maybe bitcoin (just kidding don’t do that unless you think you can lose 100% of your investment and still be OK).
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