Is It A Good Time to Invest or to Wait? Evidence
(Originally published in the Financial Times some time ago so ignore the prices and website — but do pay attention to the principles)
A bull market has crept upon us. This past week the Dow rose 20% from it’s low — fulfilling the technical definition of a bull market.
So what lessons can be learnt when a market falls all year, losing a third of it’s value, then sharply rises in just a month — confounding many online traders?
Got money? Don’t hang around, invest it.
What’s the best strategy for market gains? Should we invest immediately, wait for a market dip to end or make periodic investments. Invest immediately argues the Schwab Center for Investment Research.
They took three hypothetical investors. Each annually received $2000 on December 31st during the 20 years to 1998.
Investor A, the perfect timer, through luck and skill managed to invest in the S&P 500 at precisely the low point of each year.
Investor B invested immediately in the S&P 500 the very day he received his allocation. Investor C, ‘the dollar cost averager’, divided his annual $2000 allotment into 12 equal parcels; investing each one monthly in the S&P 500.
You would expect the perfect timer to far outperform the others. You would be wrong. At the end of 20 years, Investor B, who invested immediately in the market, irrespective of economic conditions or market trends had $350,000 whilst the perfect timer had only 6% more.
Investor C, practicing the popular investment strategy, comes 3rd with $340,000.
The risk of waiting for the ‘best time’ appears greater than the rewards. Indeed anyone who, understandably, waited to invest in the FTSE 100 since September 11th, would have missed out on substantial index gains.
US in War or Crisis begets a Bull Market. The Dow Jones has risen almost without fail within twelve months of every major US crisis in the past 60 years. Even twelve months after the Japanese attack on Pearl Harbor, Eisenhower’s heart attack in 1955, the Cuban Missile Crisis, Nixon’s resignation and US bombing of Iraq — the markets never failed to be higher a year later. Indeed, one year after President Kennedy’s assassination the Dow was up 25%.
History is against the markets being lower 12 months from September 11th.
Recessions (two consecutive quarterly declines in GDP) are not a bad time to invest.
Worried we may be in a recession? Then you should buy stocks according to smartmoney.com.
An apparently sure-fire way to beat the market is to have bought stocks in the first month of a recession. If you did that your 18 month returns exceed the average return for US stocks in general, according to Smartmoney.com who analysed all 13 recessions since 1926.
Even better, if you buy into the market at the middle of a recession, then your 18 month gains are even greater: large cap stocks show an average 46% return over that period.
Perhaps forward looking investors might even welcome a recession.
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