Updated: Sep 19, 2019
No matter what the circumstances are, when we start to see negative stories in the media which lead to market volatility questions come in about whether or not we should wait to invest new money until things calm down a little bit. I don’t blame anyone for asking the questions (keep them coming!) but it’s important that as investor you know that in the short term markets are completely unpredictable and nobody has any special sauce that will help them to get an edge over other investors. This is difficult for a lot of people to understand because with most things in life the harder you work the better the results you will see. The more activity you have, the more progress should be shown in results. With investing, just working harder doesn’t necessarily translate into shorter term results and in fact it’s often the case that adding more activity can actually be detrimental to achieving the results you are looking for.
Allow me to illustrate by using an example I have adapted from a blog I follow which you can find at the following link https://dollarsandsense.sg/why-should-not-bother-time-market-invest-when-prices-low/.
The example includes true historical figures but for the sake of the exercise we have included a fictitious investor that makes a lot of poorly timed decisions. The case study in the example is about an investor named Bob and he is the worst market timer in the world because he only invests his money right before the market crashes!
Bob started investing at the end of 1972 with $100,000. This was right before the US market fell almost 50% over the following year
He then invested another $100,000 in 1987 right before the market lost 30%
He next invested another $100,000 right before the tech bubble burst in 1999
His final investment of $100,000 came in 2007 right before the global financial crisis.
All of Bob’s investments were made into an S&P 500 index fund for simplicity
In between each of these time periods, the one thing Bob did right was to allow his investments to grow. As you can see from the example, even at the bottom of the markets during the financial crisis and having made all the wrong timing decisions previously, Bob’s initial $400,000 of investment still was valued at $2,443,766 giving him a rate of return of 7.98% per year since inception. If Bob had the discipline to stay invested throughout the crisis his portfolio would have recovered and by September of 2018 his portfolio would have been worth $11,847,271 with a rate of return of 10.26% per year since inception. These are obviously impressive numbers but what is even more impressive is that according to JP Morgan’s Guide to the Markets, the average investor had a 20-year annualised return of just 2.6% per year as of the end of June 2018. With the only likely reason for the discrepancy being investor speculation leading to poor investment behavior by simply staying invested it is reasonable to assume that you may be able to outperform most investors by a whopping 7.66% per year!
Guarantees are rare in the investment world (or at least guarantees with any real value are) but there are a few things I can guarantee for you which I think are invaluable in being a successful investor. Firstly, if you are invested in companies or investments related to the stock market, eventually you will see a market decline. Secondly, market pundits who predict market crashes year over year over year will eventually be proven right. As I have said many times before, it’s time in the market and not trying to time the market which matters most. Don’t let the negative noise distract you from what you should be doing with your investments which is having a disciplined approach to investing for the long term and focussing on quality, profitable assets.
-Grant White, CIM, CFP®
Grant White is an award-winning Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.