Is it a good time to invest? Many clients recently have asked me whether it is a good time to invest given the current situation in the world. With the war in the Ukraine, a higher than normal inflation rate, interest rate hikes, and an ever-evolving pandemic, there is a lot of uncertainty around the stock market. There always seems to be a reason not to invest. How do we make that decision in an ever-changing marketplace? By looking at 3 different aspects of the market: timing, historical data, and bull vs bear markets.
A. Timing the market
Let me start by telling you a hypothetical story of five brothers that have very different approaches to investing. Based on each of them investing $12,000 annually*, here are the scenarios that the five brothers experienced over the last ten years. Let’s take a look at what happened …
Brother #1: The World’s Perfect Investor – the luckiest brother
In the first scenario, brother #1 invests $12,000 each year on the most perfect day to invest - the annual market’s lowest point. After getting it fabulously right for ten years, he is clearly a psychic! His $120,000 is now worth $314,890. (The question you might ask yourself, “Do I feel Lucky”?)
Brother #2: First of the year Investor - the almost luckiest brother
In this scenario, brother #2 invests his $12,000 on the first day of each year. His $120,000 is now worth $311,513. (The natural problem with waiting and investing on the 1st day of the year is will you invest it or spend it before you get the chance to invest it?)
Brother #3: Systematic Investor – the methodical brother
Here, brother #3 systematically puts $1000 into the market every month. He is a systematic investor – hooray! He has followed my advice! By the end of the 10 years his $120,000 is now worth $290,026.
Brother #4: Market High Investor – the unluckiest brother
This brother is unfortunately, the opposite of brother #1. He is the world’s unluckiest investor! He somehow managed to invest in the worst day of the worst month each year. Even with his bad luck, he discovers that his ending account value is $263,875! (That’s with the worst market timing).
Brother #5: Stay In Cash Investor - the frightened brother
Brother #5 is super nervous and decides to stay in cash only. At the end of the 10-year period, the $120,000 he kept in his savings account is now worth $125,990. (With making less that the average inflation rate over the last 10 years - 2.5% - you would clearly be further behind and have less value than it was worth in the beginning)
What is the lesson here?
As we can see from chart above, no matter which of the first four brothers you are like - when and how you got in the market - you still had more money than leaving your money in the bank like brother #5! Over the long term, it only matters that you got in, not when you got in!
B. Historical data tell us owning stocks pays off
As you can see in this next chart, all the years that have ended in a positive return are shown with a green bar. The difference between the number of negative and positive years is substantial. From the data, we can see that since 1986, 83% of the time the year ended with positive returns.
C. Bulls are more Dependable Are you able to recall the good vs the bad markets? What did the market do in 2013? How about 2020? When was the last time you remember something good or bad happening in the markets?
People tend to remember the bad times over the good. This happens daily in life, markets, customer service, life events and just about anything. This Capital Group chart below shows blue bull markets and the purple bear markets. It provides a great visual on why most bear markets are generally followed by a strong bull market. As you can see, bull markets are much more frequent and dependable.
Bull, Bear and Neutral markets:
Bull markets are markets where the cumulative returns exceeded 20%;
Bear markets are determined to be markets where cumulative returns were lower than -20%;
Neutral markets are defined as those where there was no clear directional.
As you can see from the chart above, the Bear Markets are painful when you are in them but when looking at the bigger picture, you will see that the Bull Markets are bigger, longer, & stronger.
D. The final takeaway
Unless you have a short time horizon (1 to 3 years), take a long term view of the markets. No matter what is happening politically or economically, one will always find a reason to hold off on investing. Despite this uncertainty, markets have tended to prove resilient to challenges and obstacles. It is perspective that will always guide to make the right decision when is the best time to invest.
*Source of calculations: ‘Some stories you can tell the fearful investor‘ Article by Roman Samuels, George Wakim, Russell Investments.
This information has been prepared by Jeffrey Greenfeld who is an Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this blog post 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 Investment Advisor can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.