Fort Meyers, FL asks…
I received an inheritance and was going to invest, but the market’s volatility and downward turn has me concerned so I’m waiting. Is that a good idea?
Great question – and, an important one given the potential impact one’s actions, or inaction, can have on long-term returns.
In August 2015, when the market plummeted, this question arose for me daily – and, the market’s recovery since has essentially answered the question.
If you have conviction about the market’s direction over the next 12 months (bull or bear), and the money you’re thinking about investing is for the long-term, then to me it makes sense to put it to work. Trying to time the market is a mistake, and odds are you’re going to get it wrong.
The logic behind ‘waiting to invest’ during downside volatility is flawed. By definition, it means the investor is waiting for prices to recover (meaning stocks are more expensive) before they feel comfortable enough to buy. That would be like skipping a sale at a department store in favor of waiting for prices to go back up – who is going to do that? Not me!
The terminology that best describes this mindset is “recency bias.” It refers to an investor’s tendency to think that the trends and patterns we observe in the recent past will continue in the future. In the case of this past August, ‘recency bias’ convinced some investors that downside volatility would persist for several weeks or even months – and that led to cold feet. But, the market doesn’t work that way. Typically, what happens in any given day does not imply what will happen the next. That’s why it’s so important for investors to focus on thetrendlines, not the headlines.
For long-term investors, there is also the fact that missing the best days in the market can significantly impact your total return over time. In a 20-year period from 1995 through the end of 2014, an investor that stuck with stocks (S&P 500) throughout could have expected a $10,000 investment to grow to $65,543 – a 9.85% annualized return. But, if that investor missed just the 10 best days in the market (which often happen very close to the worst days that spook investors), the $10,000 investment would be worth much less – growing to only $32,665. Miss the 40 best days, and you actually lose money.
So, when it comes to trying to time the market, remember what that could cost you. I don’t think it’s worth it. This is especially the case if you have long-term growth objectives – in that scenario you are almost certainly better off spending as much time invested as you can. The numbers above prove as much.