Over the Thanksgiving holiday, I had lunch with a good friend I had not seen since the birth of his baby boy four months earlier. During lunch, he asked if it was a good time to invest in the market. I said yes. I knew he had a long-term time horizon, and I also knew he had his other financial affairs in order. His response was, “Shouldn’t I wait for a drop? Aren’t we at an all-time high?”
The average person makes thousands of decisions each day, some conscious, some unconscious. According to researchers at Cornell University (Wansink and Sobal, 2007), the average person makes approximately 267 decisions just deciding what to eat each day. Choosing to invest in the market is one of the more complicated decisions we make as it requires our emotional and cognitive energy. We worked hard for what we earned and we don’t want to lose it; we want it to grow. Investing brings opportunity but it also comes with many risks. While I’m sure he was not aware of it at the time, my friend’s actual problem was that he was afraid he would invest and lose money, regretting his decision. In an effort to avoid this feeling of regret, he was hoping to time the market.
Two and a half years ago, on June 24th, 2017, CNBC ran an article titled “Epic Decline Ahead, Stocks to Plummet 40%.” If you spend any time on financial websites, you’ll find articles and headlines like this every day. These headlines are pure clickbait, designed to evoke an emotional response from you, resulting in your clicking through only to be blindsided by some advertisement for something you probably don’t need or want. These headlines can be dangerous because they can lead us to take action that might be damaging to our wealth. What is the price of being wrong? What would the result be if an investor decided that June of 2017 truly was the market high? What if they sold everything and put it in cash?
Assume an investor invested $100,000 on June 1st, 2017:
If the investor sold out of the market at the end of June 2017 vs. holding through the end of December 2017, they would have missed out on a gain of $11,635.
If the investor sold out of the market at the end of June 2017 vs. holding through the end of December 2018, they would have missed out on a gain of $6,579.
If the investor sold out of the market at the end of June 2017 vs. holding through the end of December 2019, they would have missed out on a gain of $40,194.
Vanguard S&P 500 ETF
Vanguard S&P 500 ETF
Vanguard S&P 500 ETF
Vanguard S&P 500 ETF
If the S&P 500 reached an all-time high tomorrow, would you buy stocks? Would you feel confident investing at an all-time high? Before answering, consider that during 2019, through November 9, the S&P reached a new all-time high no fewer than nineteen times. From the beginning of 2013 through November 9, 2019, the S&P 500 recorded 225 new all-time highs! (credit: Fortune Magazine S&P All Time Highs).
2020 has the potential to be a very volatile year. Presidential elections are coming up, global tensions have escalated, and we are in the longest bull market of all time. These current events create significant noise for investors and ample opportunity for the “experts” to predict substantial market declines. These declines may occur; they may not. However, assuming capitalism works as it has for many decades, markets will generally go up over the long term. One of my favorite Warren Buffet quotes is, “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Great Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet during the century, the Dow rose from 66 to 11,497.” The Dow closed at 28,538 on December 31, 2019.
At Bragg, we acknowledge that we cannot see the future, and we distance ourselves from people who claim to be able to do so. The market is efficient; it is hard to beat the market and even harder to time the market. We believe the best way to hedge against market risk is to maintain a well-diversified portfolio. We believe that a disciplined, unemotional, and repeatable process for monitoring and rebalancing the portfolio will provide greater stability over the long term. We believe that a research-driven, transparent process delivers the highest likelihood of success over time.
When my wife and I went on our honeymoon, I wanted to make sure there were no surprises. We had been diligently saving and planning for this once-in-a-lifetime trip to Greece. We created an itinerary, made copies of our passports, recorded the names of the drivers who would pick us up from the airport, packed our carry-on bags to the brim in the event our luggage was lost, and enlisted the help of a travel agent (yes, they still exist). It just so happened that as our honeymoon departure date drew nearer, the country of Greece was fast approaching default on its national debt and there was talk of Greece exiting the Eurozone (either voluntarily or as a result of being forced out by other Eurozone members). The media termed it GREXIT. I followed the news nervously. I read numerous media stories that included the words “chaos,” “panic,” “plummeting” and “uncertainty” and recall seeing photos of Greek banking customers waiting in long lines to withdraw their money. My wife told me to relax and did her best to reassure me by reminding me that we had a good plan in place but admittedly, I was a mess as we departed for our big trip.
As I’ve come to learn over time, I should have listened to my wife! During our trip, I did not see one person in line at the banks, I did not see ATMs that had run out of cash, and I did not witness the panic portrayed on TV. There were some inevitable hiccups in our plan due to weather, but the trip was a success and one that I will cherish for the rest of my life.
Similar to developing a good travel plan, the most critical part of investing is developing a sound financial plan. As we like to say at Bragg, the portfolio should be “informed by” the financial plan. The goal of investing in the long term is to earn a decent return while minimizing the chance for loss. There will be good market cycles and lousy market cycles, and we won’t know when the good ones end and the bad ones begin until it has happened. A sound financial plan will identify your goals, savings needs, spending needs, gifting needs, and legacy needs. Based on the financial plan, the portfolio can be constructed using the appropriate blend of investments (stocks and bonds) that can meet your needs in good times and bad. Consistently revisiting the financial plan will help you tune out the drumbeat of negative market noise that will always be with us.
On January 10th of 2020, the Dow crossed the 29,000 milestone for the first time. If the Dow Jones grew at an annualized rate of 4.0% per year for the next 15 years, we would see it hit 50,000 in the year 2035 and 100,000 in the year 2050. Is it a good time to invest in the market for the long term? Yes.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.