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When to Invest in the Market?

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One of the most frequent questions posed by clients concerns whether now is a good time to invest in the equity markets.   As the last two months reminded us, even during a bull market, pull backs are quite common.  In fact, on average, the stock market experiences a 10% or greater decline almost once per year and smaller declines of 5% or more 2-3 times per year.  No one wants to put new money into their portfolio only to see it go down in the short-term, but generally the bigger risk is having money sit on the sidelines uninvested.  While equity markets can experience large declines (2008-2009 is the most recent example), historically, they have earned over 9% per annum, while cash has only earned roughly 3.5% [1].

14498871_sTherefore, when we are asked the question whether now is a good time to be invested in equities, we typically respond YES it is (although the percentage allocation will vary by each client and their circumstances).   A recent report from Charles Schwab’s Center for Financial Research titled “Does Market Timing Work” confirms this view. [2]  The author, Mark Riepe, examined the returns for five different types of investors (listed below) who each received $2,000 at the beginning of every year over a 20 year period ending in 2012.  The individuals were:

Peter Perfect, who had great market timing ability and managed to invest the $2,000 each year at the S&P500’s lowest monthly closing value.

Ashley Action, who invested her full $2,000 each year at the earliest possible moment.

Matthew Monthly, who divided the $2,000 into equal monthly allotments.

Rosie Rotten, who had the opposite luck of Peter Perfect; she invested her funds each year at the monthly market peak value.

Larry Linger, who could not determine when to invest in the market, so he chose to keep his funds in cash (using Treasury bills as a proxy) every year.

Fast forward to the end of the 20 year period and the results may be somewhat surprising.  While equity markets were substantially higher at the end of 2012 from 1992, this period did include two bear markets (2000-2002 and 2008-2009) and many corrections of 10% or more.  Even Rosie Rotten who had horrible market timing, investing at each year’s monthly peak, still managed to earn a strong return.

Peter Perfect had the highest closing value, turning his $40,000 of investments ($2,000/yr. over 20 years) to $87,004.  Ashley Action earned the next most at $81,650.  Matthew Monthly fared well with $79,510.  Even Rosie Rotten still ended up with $72,487, a gain of over 80% on her capital.  The only real loser was Larry Linger who saw his $40,000 only grow to $51,291.

The more important point of the article is that these results were consistent across nearly all time periods analyzed.   The author analyzed 68 rolling 20 year periods beginning in 1926 (prior to the Great Depression) and in over 85% (58 out of 68) of those periods, the results were the exact same (Peter performed best, followed by Ashley, Matthew, Rosie and Larry was last). 

Of the 10 periods that did not follow this normal pattern,  Ashley Action never finished in the bottom. Instead she still finished second 4 times, 3rd 5 times and 4th once.  In fact, Ashley Action who invested her funds immediately, had the second best return of the pack 91% of the time and was third or better in 98.5% of all rolling 20 year periods.  Larry Linger, by contrast only finished in first or second twice, in the periods 1955–1974 and  1962-1981.  He earned the lowest return in 91% of all time frames.

Equities have historically provided the highest returns among traditional asset classes, but with significantly more volatility.  While, investment advisors and counsellors can never guarantee results, nor can they always determine the best time to invest in the market, but at TriDelta Investment Counsel, we suggest that all long-term investors have an allocation to equities in their portfolios.  As the report suggests, we prefer the odds of Ashley Action and Matthew Monthly achieving their financial and retirement goals much better than those of Larry Linger.



[1] http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html.  Returns on S&P500 from 1928-2013 had a geometric average return of 9.55%.  3-month T-bill average return was 3.55%

[2] For a copy of the report by Schwab Center for Financial Research, please go to: http://perspective.schwab.com/mobile/article/7510/Does-Market-Timing-Work.

 

Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
lorne@tridelta.ca
416-733-3292 x225
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