Once you’ve left the market to avoid volatility, when do you get back in?

 
 

When is the right time to invest? With many of the world’s stock markets routinely reaching new highs, investors face difficult decisions: “Should I sell my equities?” or “When should I invest in the market?” Reaching an answer is made even more difficult by the perception that our interconnected world is in a mess, with the threat of war in the Asian Peninsula, governments needing to access more credit, and our political leaders generally acting erratically.

If we look to history for some guidance, we discover some reassuring trends. Over time, the stock markets have trended strongly upwards, no matter what is happening in the world, politically or economically. Markets react in the short term, but they bounce back, usually with little or no prior warning, to surge past previous highs.

 

Growth of $10,000 over 40-year period,
1975 – 2015


Chart 1_Growth of $10k.jpg

Investors who reduced their exposure to equities because they feared market volatility have further tough decisions to make in order to determine the right time to move assets back into the market. With 20-20 hindsight, it is clear that March 9, 2009 afforded the best buying opportunity in a generation; however, buying stocks on that date would have taken extreme fortitude, given the following headlines:

  • How low can stocks go? The Wall Street Journal's Money and Investing section on March 9, 2009.

  • The S&P 500 (SPX) index lost nearly 7 points or 1%, to end at 676.53, its lowest point since Sept. 12, 1996. CNN Money

  • The Dow closed at 6,547.05, its lowest close in 12 years. The value of all U.S. stocks had dropped from a peak of $22 trillion to $9 trillion, a staggering loss of wealth. ABC News

  • Goldman Sachs put out a research report that warned the S&P could fall as low as 400.

One year later, the DJIA was up more 60 percent, and I have yet to find an investor who bought equities that day. (Don’t e-mail me and tell me you did because I won’t believe you!)

Investors who wait for a safer time to reinvest often get caught. As always, their intention is to follow the time-honoured principle of “buy low and sell high.” Fear of loss leads them to do exactly the opposite of what they intended: not only do they sell their stocks at a low point, they fail to reap the rewards of a strong rebound. As the chart below shows, missing even a few days over the course of a forty-year period can have a significant negative impact on your long-term returns.

 

The Power of Staying Invested, US

The Impact of Missing the Best One Percent of Days Over Forty Years
of Investing $10,000 in the S&P 500 Price Index

Chart 2_Power of Staying Invested.jpg

Successful investing takes the kind of unemotional self-discipline that most of us cannot sustain without help: it’s hard to keep your eyes fixed on the horizon when storms whip up big waves. The first priority is to set up a properly diversified portfolio with an asset allocation of stocks and bonds that allows you to reach your investment goals and sleep nights. To guard against your emotions subverting your success in turbulent times, decide in advance what you are going to do in various scenarios and rely on a trusted advisor to help you stick to your plan. In the end, that is probably the most important service your advisor can offer towards helping you have a positive investing experience.


Dale Berg is a Senior Financial Advisor with Assante Financial Management Ltd. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Please contact him to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.