Fear of (Market) Heights? Don’t Panic
MODERNIST’S ASSET CLASS INVESTING PORTFOLIOS ARE STRATEGICALLY INVESTED WITH A FOCUS ON LONG-TERM PERFORMANCE OBJECTIVES. PORTFOLIO ALLOCATIONS AND INVESTMENTS ARE NOT ADJUSTED IN RESPONSE TO MARKET NEWS OR ECONOMIC EVENTS; HOWEVER, OUR INVESTMENT COMMITTEE EVALUATES AND REPORTS ON MARKET AND ECONOMIC CONDITIONS TO PROVIDE OUR INVESTORS WITH PERSPECTIVE AND TO PUT PORTFOLIO PERFORMANCE IN PROPER CONTEXT.
More people have lost money waiting for corrections and anticipating corrections than in the actual corrections. –Peter Lynch (1)
Deciding to invest extra cash can be scary when markets are close to their all-time high. Maybe that’s something you experienced a lot last year, as the U.S. stock market broke its record no less than 60 times in 2021! (2) Perhaps a sell-off “feels” imminent and by investing we feel like we’re risking hard-earned savings decling in value. It’s true that most investors would prefer to buy into the equity markets after a dip, hoping to get more growth on their initial investment. So when markets are close to their high, we often hear: “Should we wait for a correction before we invest new money?”
But even before we consider whether to invest, we need to understand our timeline for using the funds. If you intend to use the money for spending throughout retirement, then your timeline is likely long, and for investors with a longer timeline, investing additional money into stocks is appropriate even if the market is at or close to its high.
30 years of “bad” market timing still wins
consider a hypothetical investor who we know has the absolute worst market timing. Let’s go back 30 years and assume our investor starts by investing $10,000 in stocks. They then invest another $10,000 at various points over the next three decades, but in each case, they manage to buy in at the market peak.
In other words, this investor only invests at market highs prior to big drops. The chart shows their experience.
Returns over the last 30 years for a hypothetical investor who started with $10,000 invested in U.S. stocks, and then only invested again immediately before a market downturn of 10% or more. Over this time, the U.S. market returned 10.2% per year, and the investor with the worst timing earned 9.3% per year. (3)
This hypothetical investor turned a total investment of $60,000 into more than $350,000 over the 30-year period. They survived five significant declines in which their portfolio fell by over 10%, dropping an average of once every six years. Each market decline averaged roughly 11 months, followed by another 21 months to recover.
In other words, after a big investment, our investor waited an average of three years before they started seeing a positive return on their investment (and it was almost seven years after 2008). However, despite investing at peaks, our investor’s portfolio still grew significantly. (4)
While it’s no guarantee for the future, history has shown that the question isn’t if stock markets will go up but when.
US markets versus global allocation
This example only looks at investing in one asset class – U.S. stocks. Although U.S. markets were at highs frequently in 2021, tempered valuations in other markets suggest better investment opportunities exist internationally. No matter which valuation ratio we choose, the U.S. is more expensive than over 70% of other developed markets and more expensive than 90% of emerging markets. (5)
Our Modernist portfolios manage the risk of market declines by investing across multiple economies, both developed and emerging. This can support balancing stock risk with high-quality fixed income, aiming to add more stability and helping to ensure the declines aren’t more than clients can emotionally tolerate.
No one knows which direction markets will move tomorrow. And anyone invested in the stock market should expect to see declines in their portfolio. That’s part of investing. But just because stocks are at their highs doesn’t mean they won’t go higher – the U.S. markets proved that over 60 times in 2021!
Modernist Portfolios
We expect stock markets to be up over the next 20 years, which means that, on average, we expect any given year, month, or day to have a positive return. And if we expect a positive return, we should invest new money immediately.
Although that can be scary, history has shown that even if we have the worst timing and invest at market peaks, having a long investment horizon allows us to stay invested until it recovers. Success isn’t determined by when you invest; it’s determined by sticking with your financial life plan and how long you intend to stay invested.
