That is a question we often hear from prospective clients. The answer is, yes — and no.
There is always uncertainty, and the markets could plummet tomorrow. Even though we follow markets closely and read endlessly, we can’t predict the future.
So, let’s look at the market right now. There are lots of reasons we might advise an investor to avoid it:
- Whole parts of the country are still on some form of a lockdown, unemployment in certain sectors is high and uncertainty abounds over the timing of a return to so-called economic and social “normalcy.”
- Market valuations (which are used to judge whether companies are over- or under-valued) are high. For example, the widely followed Shiller’s “CAPE Price to Earnings” ratio is at 34.77 versus a 25-year average of 27.54.
- Interest rates are likely to be rising in the near term. That makes debt more expensive, and it creates uncertainty (and markets hate uncertainty).
- There are concerns that the impact of government stimulus efforts combined with a resumption of spending that was restrained under the lockdown will be inflationary.
- And then, to quote Donald Rumsfeld, there are the “unknown unknowns.” Those are the truly frightening “black swan” events that catch the world by surprise. Think 9/11 or the credit debacle that led to the Great Recession.
Despite the reality of constant uncertainty, we need to balance that with the fact that there is still so much good news: many corporate earnings in many areas are strong, unemployment is improving, inflation is low, whole portions of the US economy did manage to adjust to the pandemic and there is thought to be significant pent-up demand for services that will drive growth (restaurants, travel, live music, etc.).
KNOW WHY YOU’RE INVESTING
Let us re-frame this discussion and ask a few questions: What is it you are investing for? A quick financial pop? A year in and then out? Indeed, most investors look at one-year returns. We are creatures of the calendar.
And if measured by that simple approach, then things can look volatile: since 1926 we’ve had seven years with calendar year losses of 12 percent or more. Four of those years saw losses of greater than 30 percent (including 2020). For a bit of historical perspective, from July 1932 through June 1933, the market declined by nearly 70 percent!
But how many of us are investing just for one year? Most of us invest for retirement — the long term, 20 or more years. Well, it turns out the longer you look at your investing horizon, the smoother things get. Or to put it another way, the longer you hold on, the more likely you are to not experience a loss.
For example, if you invested your money in the S&P 500 over any 20-year period since 1926 through to the end of 2020 (we call these rolling period returns), you would never have experienced a negative return. Yet those 20-year periods included the Great Depression, World War II, the Korean War, the Vietnam War, stagflation, Watergate, the dotcom bust, 9/11, the Great Recession and the COVID pandemic.
Over this period, the market went up 75 percent of the time. Fourteen of those years saw returns greater than 35 percent. The average return for the S&P 500 over this period was 10 percent. During that ride, we experienced pockets of stomach-churning volatility, but markets recover and move on. That is the unseen benefit to every economic down cycle.
PLANNING FOR VOLATILITY
So, how do you handle that volatility? Plan for the worst, and hope for the best. If you are living off your portfolio, set aside cash for rainy-day spending. Use this money instead of pulling it out of the markets when they are down.
Diversify! Have U.S. large cap and small cap stocks, and diverse types of bonds, invested in international markets. And breathe. Do not let the drama of the news cycle scare you into panic selling.
So yes, now is a suitable time to get into the market, if you are investing for the long term.
CFP®, Senior Wealth Advisor