No one likes to invest at the height of the stock market. With prices near all-time highs and plenty of risk on the horizon, it’s no surprise that investors are worried about a significant market pullback negatively impacting their portfolio returns. Instead of worrying about potential risk scenarios, one exercise I like to deal with a seemingly difficult problem to solve is to reverse a problem. Thinking about a problem in a different light often helps me uncover hidden beliefs about the question I’m trying to answer. As Charlie Munger always says, “Reverse, always reverse”.
For concerned investors, a more relevant question to ask in my opinion is: what happens if one invests only at market peaks? (hint: the answer may surprise you)
Let me introduce you Dan, he only invests at the peak of the equity markets, just before a significant market correction.
• In March 1973, he invested $ 50,000 in global stocks, just before the oil embargo, which saw stocks fall by more than 40% over the next 18 months.
• In 1987, he invested $ 50,000, just before the infamous Black Monday, only to see the markets drop 20%.
• In December 1999, he decided to invest an additional $ 50,000 in stocks after seeing several of his friends make money easily and quickly in the stock markets. Of course, December 1999 marked the peak of the dot-com bubble, which saw stocks fall by over 45% over the next several years.
• In September 2007, he decided to plunge one last time into equities just before the bursting of the real estate bubble in the United States, triggering what is now called the Great Financial Crisis. This crisis saw global equities fall by almost 60% over the next 2 years.
• Knowing how unlucky he was in the timing markets, he remained invested throughout, fearing to sell at the worst possible time as well.
• Looking at his portfolio in March 2020 (when the stock market hit a new low during the Covid pandemic), he was pleasantly surprised to see over $ 1 million worth of his initial investment of $ 200,000. That meant an annualized return of over 6.1 percent, which wasn’t too bad.
• If he had held out until the end of October 2021, he would have earned $ 1.8 million, an annualized return of almost 7% over his initial investment of $ 200,000 over the years.
However, most investors can probably do a lot better than that, with disciplined, regular investing and regular rebalancing of portfolios. Even a simple average of dollar costs in the market throughout the business cycle on a regular basis would perform better than this extreme buy-to-peak and hold strategy. Ideally, everyone wants to buy at the lowest in the market and sell at the highest. However, it’s next to impossible to get it right consistently and do it with enough capital to meet your long term goals and financial goals. While the above is an extreme hypothetical illustration, there are in my opinion three key points for investors to remember:
1) There are always uncertainties in the financial markets. Instead of focusing on the uncertain, we should focus on what is relatively more certain and base our decisions on that. Numerous studies show that the discipline of investing regularly throughout the cycle and staying in the market for the long term will improve the odds of success, certainly beyond a buy (at the top) and hold strategy. .
2) While it is always painful to see the markets go down right after you invest, with enough time in the market, the outcome is not as bad as you might think. Losses are an integral part of the investment. What is perhaps less obvious is the loss of opportunity, which may seem a little less painful, but no less real. The sooner you start investing, the longer the trail of compound returns. Make time your best friend.
3) The famous investor Benjamin Graham put it succinctly: “In the short term, the stock is a voting machine, but in the long term, the market is a weighing machine”. Would you rather subject your wealth to the vagaries of market fluctuations or create a disciplined game plan to capture what the stock markets will ultimately offer in the long run?
– Audrey Goh is Senior Cross-Asset Strategist in the CIO office of Standard Chartered Wealth Management.