Many feel that the country and the world are on the brink of challenging times, and many investors wonder if they should get out of the market and wait to invest because a better time may come along in the future. In this episode of the One for the Money podcast, I share why this is always the wrong strategy.
In this episode...
- Fear of investing in uncertain times [01:19]
- The relationship between difficult times and stocks [04:30]
- Investment mistakes and the importance of discipline [10:37]
- Don’t let emotions get the best of you [13:18]
- Planning and spending for more experiences [17:16]
Investments in uncertain times
When someone is about to make a significant investment, they often wonder if there might be a better time to invest later. This same fear is gripping the hearts of people invested in the stock market, with many wondering if they should be more conservative.
With ongoing conflicts in Europe and the Middle East, there is a growing concern that we are heading towards a period of instability. Despite predictions of an economic downturn, it has yet to materialize. The upcoming presidential election is causing anxiety as both major party candidates have historically low approval ratings. As a result, many individuals are hesitant to invest or stay invested.
Losses are twice as impactful for investors than equivalent gains. Studies have shown that a 10% loss hurts twice as much as a 10% gain. However, being afraid of the future market is a dangerous mindset that will not lead to successful investing. For this reason, one should always invest according to one’s goals and in alignment with time-tested investment principles.
Data perspective
Since 1926, bonds were negative just 15 times, with an average loss of just 2.4%. Over that same period, stocks were negative just 25 times, with a significantly higher average loss at 13.2%. That’s why bonds are beneficial for short-term goals: fewer years with negative returns, and those negative returns were considerably less than what they were for stocks.
For longer-term goals, we invest in stocks. Since 1926, stocks returned between 8-10%, whereas bonds only returned between 4-6%. Over the past century, the U.S. stock market has been up nearly 75% of the time, and for 60% of the time, those increases were more than 10%. More than 33% of the time, those increases are more than 20%. Historically, you are more likely to have a gain of 20% in your investments than to experience a down year.
Investment behavior
Some don’t succumb to the fear of a down market but rather the belief that they can correctly time the markets and know when to sell or buy. But the two most successful investors in history, Jack Bogle and Warren Buffett, said they had never met anyone who could correctly time the markets. The famous investor Peter Lynch explained the fool’s errand of market timing best when he said, “More people lost money waiting for corrections and anticipating corrections than the actual corrections themselves.”
JP Morgan’s Guide to Retirement highlights the perils of trying to time the market and why it doesn’t work. Using data from the S&P 500, the guide shows the performance of $10,000 invested between January 1, 2002 and December 31, 2021. The initial investment would have grown to over $61,000 during that period. But if the best ten days were missed, then the initial investment would have grown to only just over $28,000. That’s missing only ten days out of 5,000 or just 2% of the time invested. If you have long-term investment goals, investing and staying invested is essential. Every investor should have an investment plan that aligns with their goals and can help them navigate challenging market conditions.
Securities and Advisory services offered through LPL Financial. A registered investment advisor. Member FINRA & SIPC.
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