It’s the most common question I’ve received for many months. “I’m new to investing. With the market near its peak, should I wait for the market to get a bit cheaper?” Such investors know their history—at least some of it. Markets rise and markets fall. Now that we’ve seen a very visible fall, the same folks are wondering if they should wait some more.
But there’s a bigger story to tell. I started to invest at a market peak. It was 1989. The S&P 500 was at its highest point in history. It had gained more than 30 percent that year.
Nobody told me that stocks were at an all-time high. Nobody told me that markets might jitter when U.S. troops invaded Panama. Nobody told me to wait for the world to react when the U.S. shot down two Libyan fighters over the Mediterranean. Nobody told me that the The Tiananmen Square massacre might send stocks into a spin. Ignorance was bliss.
Most investors weren’t so clueless. Their knowledge may have hurt them. Many pulled out of the markets after a strong run or a news headline. Others sold their investments after a market dip. But when it comes to investing, it can pay to be clueless. Someone investing $10,000 into an S&P 500 index fund from January 1989 to August 2015 would have seen that money grow to about $123,124. The S&P 500 averaged a compounding return of 9.8 per cent per year.
Most investors didn’t do that well. According to Dalbar’s research, from 1990 to 2010, the average U.S. stock investor averaged just 3.83 per cent per year. Investment fees were part of the problem. But poor behavior was mostly to blame.
I invested about $3,000 in 1989. I was nineteen. It was 100 percent of my net worth. In 1991, stocks hit another all-time high. They went even higher in 1992. In the 27 years that I’ve been investing, the S&P 500, including dividends, has hit all-time highs during 16 different calendar years.
I’m now 45 years old. Over my lifetime, the S&P 500 (with dividends reinvested) has hit new all-time highs during 29 calendar years. Instead of worrying about all-time peaks, consider them normal. Whatever you do, don’t jump out of the market (or fail to get in) because you expect stocks to fall. Even a few days out of the market could cost you some big gains.
Between 1963 and 1993 the stock market was open during 7,802 days. University of Michigan Professor H. Nejat Seyhun found that during that period, 95 percent of the stock market’s gains came from just 90 of those 7,802 days.
That wasn’t an anomaly. The S&P 500 averaged a compound return of 9.85 percent between January 1995 and December 31, 2014. That would have turned a $10,000 investment into $65,475.
Investors who missed the best five stock market days would have averaged a compounding return of just 7.62 percent per year. Instead of seeing their money grow to $65,475, they would have ended up with $43,435.
By missing the best 20 days, this money would have grown to just $20,360. Investors unlucky enough to be out of the markets for the best 40 days would have lost money. Their initial $10,000 would have shrunk to $9,143.
Don’t Jump Out Of The Market
January 1995 - December 31, 2014
|1995 - Initial Investment||# Of The Best Market Days Missed||Average Compounding Annual Return||December 31, 2014 - Portfolio Value|
|Index Fund Advisors; Yahoo! Finance - Created: 3/9/15|
We’re often tempted listen to expert forecasts. But the emperors wear no clothes, according to data provided by CXO Advisory. “To investigate, during 2005 through 2012 we collected 6,582 forecasts for the U.S. stock market offered publicly by 68 experts, bulls and bears employing technical, fundamental and sentiment indicators.” Based on the firm’s data, coin tossing would have been better.
Investors, instead of speculating, should maintain a diversified portfolio of low cost index funds. Rebalance the portfolio once a year. Stock market forecasters, as Warren Buffett says, exist to make fortune tellers look good.
So when is the best time to invest? The answer is simple. Invest as soon as you have the money. Don’t be afraid of market peaks. They happen all the time.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas