Originally published in North Bay Business Journal
There's no denying that a lot is happening in the world right now. The news is filled with headlines about the debt ceiling debate, the war in Ukraine, inflation, and the state of the economy, which may lead many to doubt or feel worried about their investments. They might be asking themselves, 'should I be in the markets right now?' However, this isn't a new question or sentiment. In fact, it's a common question we hear in times like these. There are always political, economic, and social events happening that shape the world around us, inspiring either confidence or fear.
Looking back at past events that shook investor confidence may help to put into perspective today’s economic and political conditions. Three that are top of mind are the COVID-19 pandemic, the 2016 presidential election, and the 2008 financial crisis. Are conditions now really worse to invest than they were then? What was the result of investing during these periods?
The COVID-19 pandemic changed our world. Lockdowns, delivery services, and video conferencing became a way of life. Supply chains around the world were strained and demand for toilet paper skyrocketed. Markets were sent into turmoil. From January 1st of 2020 to March 20th, the S&P 500 dropped 30%. Investors making decisions based on that first quarter might have felt justified that the rest of the year would be a disaster in the markets. However, over the subsequent three quarters of 2020, the S&P 500 was up 70% to finish the year positive, up 18.5%. Even something as dramatic as the COVID-19 pandemic seemed to be a mere blip in the long-term performance of markets.
In 2016, we heard from clients often about how the contentious upcoming presidential election between Hillary Clinton and Donald Trump was going to send markets into a freefall. We heard some clients expressing a desire to hold off on entering the markets. In the lead-up to voting day, markets were mixed. From July 1st to November 7th, the S&P 500 rose about 2%, but market volatility spiked. Looking forward a year from voting day, the S&P 500 jumped nearly 27% and would go on to continue the longest bull run in market history. Looking at a chart, you would be hard-pressed to find any impact of this election on markets. Still, many investors missed out on gains they might have had if they had stuck it out or invested their cash.
The 2008 Financial Crisis pushed many investors out of markets and struck fear into the hearts of those still in the markets. From January 1st of 2008 until the bottom of the bear market in March of 2009, the S&P 500 lost over 50% of its value. The low in March of 2009 would mark the beginning of the longest bull market in history, lasting over 10 years and returning almost 500% before 2020. Often, investors didn’t feel comfortable entering back into the markets for years and may have jumped out after taking a loss. Investors missed out on hundreds of percentage points in market growth.
The fact is, no one knows exactly when a market drop will occur or when it will rise. By trying to choose an entry point to buy back into the markets, you are likely missing out on gains by sitting and watching the markets for just the 'right' time.
If you are still worried about unlucky timing, consider dollar-cost averaging to buy in slowly over time. This strategy is all about easing into the markets by investing portions of your money on a scheduled basis. If the market is going down during this time, you will continue buying in at a lower price and get a better entry point than if you bought in all at once. Alternatively, if the market is going up as you buy in, you will face a higher price with each purchase.
To long-term investors, time in the market is much more important than trying to time the market. From 1990 to 2021, the S&P 500 returned an average of 10.76% per year. If you missed just the five best trading days of those 30 years, your average return dropped to 9.18%. If you missed the best 25 days, your average return dropped to 5.55%.
So, is it a good time to invest? There will always be uncertainty when it comes to the markets. Even if we follow them closely and read endlessly, we can’t predict the future. If you are investing for the long-term, then it’s as good a time as any. Keep in mind that the total time spent in the market has a bigger influence than the time of entry and try not to let the drama of the news cycle scare you off.
