Without fail, every so often there is a big event in the news that gets people to think about their investments.
Earlier this year, it was COVID.
"Since the start of the pandemic, millions of Americans have been forced to reevaluate their plans for retirement.
401(k)s have taken a serious hit this year, and many people who lost income due to pandemic hardships have resorted to raiding their nest egg or scaling back their retirement contributions in order to scrape by.
A recent study found that 40% of Americans weren't properly prepared for the pandemic, and more than half the population has fallen behind with their retirement savings this year, according to the latest financial stress survey by John Hancock."
- The intro from this MoneyWise article
And now it's the election.
People are running around trying to figure out when is the best time to buy, sell, or hold on. Is it before the results are announced? Is it after? What if we don't find out on election day?
Along with that, headlines and experts always seem to be telling us that P/E ratios are too high, stocks have become overvalued, they can't stay this high forever, and that now may be a good time for investors to take defensive action before the inevitable correction comes.
They might be right. But if there's anything we should not do, it's to take reactive action based on news-derived emotionally charged statements and opinions.
So <<First Name>>, if you're like saldaddys who's trying to calculate just the right time to get into the market, I want to show you why ignoring the news and the goings-on in the world may be your best investment of all.
You can still watch the news though. You know, for the entertainment value.
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Those who forget the, uh, oh you know the thing, are doomed to repeat it
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Imagine that you're back in mid-2008. It's also an election year. There's been a lot of talk and news about how P/E ratios are too high, stocks have become overvalued, they can't stay this high forever, and it might be a good time for investors to take defensive action.
Or, they were saying completely the opposite. I can't quite remember.
Either way, you take a look at the S&P 500 (from here on out, "the market") and see this:
Pretty scary, right? The market just came off of an all-time high. Looks like it could be a repeat of the Dotcom Crash. Maybe it's not the best time to invest. Maybe it's best to wait until the election is over.
But there was just a little correction, and the market seems to have bounced back. Maybe all that FUD about the sharp drop was unnecessary and overblown.
Let me ask you this, would you regret having gotten into the market at the tippy top just before the crash?
Take a look at this before you answer:
If you had invested in the market at the worst possible time in 2008 and just held on, your investment would have grown 119% (sans dividends) by today. Of course, waiting until after the election to invest would have been much better, but I've illustrated the worst possible scenario with the green line.
Think about it. How bad is that?
Besides, if you had a financial system in place that auto-invested every month for you, you would have enjoyed even greater returns from purchases all the way down and up the crash.
I want to show you one more graph, a normal distribution curve. It shows you the probability (Y-axis) of getting a given return (X-axis) over any 20-year time horizon in the market.
Note the word "any". This chart was constructed using data on the S&P 500 from 1871 to 2019. Keep this in mind.
The blue line shows the distribution of real (inflation adjusted) returns with dividends re-invested (remember to tell your broker to reinvest dividends).
While past performance is no guarantee of future results, what this chart implies is that if you invest in the market at any point and forget about it for 20 years, the most likely CAGR you'll get is just under 7%.
In other words, if you had randomly thrown a dart to pick a year between 1871 and 1999 to invest in the market for 20 years, your most likely inflation-adjusted return would have been just under 7%. The absolute worst case was 0.5%, and the best is 13.5%.
Really think about it. How bad is that?
Amazingly, if you had invested in the market at the very tippy top just before the 2008 crash and held on, your CAGR would be just about 7%. How likely is that? The most likely.
I have no idea what the market will do after the election. It might tank by 50+% on bad news. It might do nothing. It might jump on the good news. But based on what I know and can verify, what I'm going do with my investments before the election is nothing. Of course, if the market were to tank by some big amount, I'm planning to get more in to it.
The worst that could happen is just under 7%.
And if you're investing without a plan, it's high time you developed one. News-based reactionary investing tends to compete in the same category as High-Yield Savings Account investing.
Be well!
-Arjun
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