Why you need to stay invested
Over many years of running this blog, there always seems to be a few times per year when I get questions like these:
When do you think it’s a good time to invest, Mark?
Mark, I have a few thousand bucks saved up to invest right now but I’m very hesitant to pull the trigger. I believe a market correction is coming. Thoughts?
Do you think now is a good time to jump back into the market?
Markets seem to be inching higher to all-time highs. Should I invest now or wait?
I have to say, these are all very good questions to ask.
The problem is, I can’t tell you any answers. I can only tell you get invested and stay invested.
Why stay invested
You see, the problem with constantly contemplating about any financial future is you will probably end up invariably wrong.
Of course, some financial experts might claim to be able to see the future. I would argue those guesses won’t be much better than yours. Such experts just happen to be compensated for thinking they know what might happen.
Unfortunately for your money, wondering if you should be in the market, out of the market, waiting out market highs for lows, or mulling over a decision about when to invest leads to no darn good.
Case in point:
Back in the day, Peter Lynch who managed a flagship fund called the Magellan Fund at Fidelity Investments between 1977 and 1990, was able to deliver whopping annualized returns of about 29%. I mean, that was about twice the returns provided by the S&P 500 during the same investment period.
What was Peter Lynch’s secret sauce to success? Staying invested he said.
Arguably one of the greatest money managers of our modern time, believes his significant returns were the result of staying investing and acting with a long-term focus for this selections. His practical advice, to retail investors like you and me can be summarized rather succinctly:
“More people have lost money waiting for corrections and anticipating corrections than in the actual corrections.” – Peter Lynch
Reminders about staying invested – stay the course
With that wisdom in mind, if you’re wondering about whether to invest at market highs like today or simply waiting things out, here is some investment advice I personally follow and you can too:
- Long term, it seems investing in the Canadian and U.S. stock market has been a very good place to be to build wealth. I will continue to invest in these markets with a multi-year view in mind.
|Index||Proxy Fund||5-year return||10-year return||Since inception|
|S&P/TSX (Canada)||XIC||6.27%||6.77%||6.53% (2001)|
|S&P 500 (U.S.)||IVV||11.65%||13.50%||6.15% (2000)|
Returns courtesy of iShares site, up to December 2019.
- Based on my personal experiences with market volatility, I believe any investing time horizon >5 years you can consider investing in stocks. The longer your intended holding period, the higher % of stocks you may wish to own for income and growth. However, if you need any money to spend with any certainty within 1, 2, or even 3-4 years, then put that money in cash or a money market fund or in a fixed-income investment product.
- If the market goes down by 10% or even by 20%, and you are likely to sell any stocks, you should consider reducing your stock allocation to the point where you won’t sell stocks when the market falls by that amount.
- I’ve learned that keeping a portfolio of cash is not going to deliver any meaningful rate of return. Cash should be set aside as a hedge for emergencies, for future short-term spending needs, and it can be built up to make more equity purchases with time.
- Since it is impossible to time the markets, I prefer to invest money when I have it. If that is not comfortable for you (or you disagree with me!) then consider the next best thing: a dollar-cost averaging approach. This way, you will get your money invested eventually, slowly, over a pre-determined period of weeks or months.
Behaviour trumps all
Like most things in life, good behaviour trumps all.
So, while having a decent savings rate in the first place along with low-cost investing approaches will absolutely help you on your path to financial independence (as it is helping me), ultimately your ability to do next to nothing with your investments will be the very best predictor of future success.
Thoughts on your behaviour to yield the best returns? Share and comment away.
Good article Mark,
I stay around 95% invested in ETFs and defensive stocks in my TFSA. The remaining 5% cash (from dividends and contributions) I use to either add/balance my positions during corrections or use as “risk/play” money for small cap stocks. I am pretty focused maintaining that 95% number. Essentially, I also follow a buy and hold philosophy, but I like to have a little bit of wiggle room with endangering the bulk of my portfolio.
Thanks for writing these articles!
Seems very smart to me Robert and the less speculation, the more long-term, low-cost game plan you have the wealthier you will be. History says so!
All the best,
Good articles as always, Mark. Lots of financial experts talk about stocks hedging? What exactly is it and how do you do it? What are the benefits and drawbacks for doing it? Is it more advantageous for investors to do any stocks hedgings when buying U.S. stocks in Canadian funds instead of buying the same U.S. stocks using U.S $$? I have a very limited knowledge of how the system works. Any advise and explanation is greatly appreciated. Thanks a lot Mark.
Good questions Ken!
Essentially hedging is a form of risk management (or risk-taking) and the latter typically involves a financial product called derivatives. You can find some good details in these posts:
Personally, I don’t there is any value is such a strategy for most investors because complicated investment strategies usually only benefit one person – the person that developed the products for the strategy.
You’re best off investing in low-cost, easy to explain, simple products or funds I believe 🙂
Hope that helps and happy reading!
You said it Mark, behaviour trumps all. If you have a good investment plan, and can stick to it, then you’re miles ahead of the average investor.
We’ve got a relatively conservative asset allocation (for our age anyway) and we love it. We rebalance with contributions and reinvested dividends and only sell to rebalance when our allocation is off by more than 5%. This has lead to two “sell to rebalance” periods over the last 5-years.
The other thing I like to see people do is NOT check their portfolio/net worth too often. For most people every 6-months is fine. The more often you check it the more likely you are to notice these small variations. If you only look every 6+ months then you’re more likely to see the underlying growth and not the random fluctuations.
“For most people every 6-months is fine.”
Agreed, every few months if just fine.
BTW – maybe more case studies in early 2020 if you are game 🙂
All the best Owen,
It’s getting more difficult every day not to take some profits off the table. It was all I could do today not to sell half of several holdings. These stratospheric prices can not possibly be based on reality can they?
Hard to say. People were also saying that a few years ago. Keep some fixed income and cash and GICs just in case 🙂
I hear ya! It’s hard not to pull the trigger and sell off something and take the profits before armageddon. I’ve decided to slowly start cashing out my RRSP account in 5k increments to fund some of my bucket list travel requirements each year. Sold some TRP at $71/share and it’s now gone up to 71.34. Oh well, I won’t think about that when I’m in Ireland this fall!!
I’m not so worried about an armageddon like scenario. If a real catastrophic event happens we’re all scuppered anyways. I’d just like to really see some down days from time to time. I can’t see the rational for these prices. Now I managed to not do anything but it took leaving the house for a bit. More red on the screen today so not quite as teased.
My two cents, I prefer time in the market vs timing the market ?
Since I started investing in Dec 2015, i’ve only made 4 sell transactions and that’s it! I just buy, hold, re-balance, and repeat.
Time in the market for sure. Makes me wish I had a bunch of cash in my younger years but alas…such is life!
I generally agree with your post and its replies. I think I have been following your blog for 10+ years now, and I share your investing philosophy to a great extent. However, in the last days of 2019 I started to ask myself about the true reasons behind the 2019 outstanding market rally and the 10 year old bull market. Was it because the economy was doing so good or because of all the QEs (1,2,3 ,etc) combined with interest rates held close to zero for so long. Then, I have been meditating on the fact that the US government has more the 120 trillion unfunded debt liabilities, 22+ trillion national debt, is running trillion dollar budget deficits each year and the only two ways to meet its obligations are either to default or inflate its debts. How about the debt to income ratios of both American and Canadian households (I won’t even mention Europe and the rest of the world). Finally, what is the current Schiller’s PE ratio of the US stock market and how does it compare to it’s value before the 2008/2009 financial crisis?
Obviously, the answers to all these questions are far from “rosy”. You split can’t add a row of negative numbers and come up with a positive sum.
Potentially, 2020 might bring another double digit return to the equity markets and that’s why I am not selling any of my holdings. On the other hand, I am not eager to make more purchases unless I am convinced that I am buying dollars for cents. I have put around 6% percent of my liquid assets in precious metals (some bullion, some gold and silver ETFs and some mining ETFs) as insurance toward both strong inflationary or deflationary scenarios. Finally, I will buy some protective puts on my most “risky” and overvalued assets.
My strategy may be wrong in 2020 and make me miss some of the market returns but I know I am right in the long run.
Best of luck to you and your readers!
Pavel, you raise some interesting points. I feel there are two big reasons for the long-bull run: 1) prolonged low interest rates and because of 1), the love of debt and therefore folks are debt drunk. I certainly worry a bit about what’s on the other side. For folks who have lots of debt, it could be very, very nasty.
I am saving $$$ for more U.S index funds now and that’s about it now that my 2020 TFSA is full and out of contribution room again. Other than that, hopefully the mortgage is done in another 3-4 years. Life will be great when I’m debt-free and I can consider semi-retirement.
Mark: I thought “The 6-Pack Portfolio” book hit on an interesting idea, so I’m looking at that. Two questions:
1. Could you narrow down the best choices for the six areas he discusses?
2. My TFSA is quite full already with Canadian equities; would it be better to put these 6 in my RRSP, which is not yet
nearly full, vs. a nonregistered acct.? I assume the dividend tax credit only works in nonregistered? Also, do I trigger
any tax liability while dividend stocks remain unsold, and just ‘dripping’ inside a nonregistered acct.?
Great stuff Bill. I founds Jason’s book overall, well done. Did you see my review of it and interview?
Jason wrote a book about largely what I have done, “unbundled” a Canadian ETF:
1. I can’t offer advice but I recall Jason believed his 6-pack would include a bank, a railroad (e.g., CNR or CP), a utility, a telco (e.g., T, BCE, or Rogers), a pipeline (to include our energy sector), and a REIT. It would avoid other cyclical sectors.
2. Again, not sure of your goals, but Jason and I invest very similar I believe in that we use our RRSP for U.S. assets – to take advantage of U.S. market for more diversification outside of Canada. You certainly don’t have to do that but I think owning companies outside of Canada is a good idea long-term.
3. Correct, the dividend tax credit applies to taxable / non-registered accounts. Here is a primer:
There is a tax liability if you DRIP your stocks in a taxable account in that you need to keep track of your adjusted cost base – the rolling amount you paid for the stocks. This way, you can calculate your capital gains (or losses) if/when the stocks are sold.
Hope that helps!
Perfect timing for your article Mark ! as the market at all time high but then every couple of weeks is all time high 🙂
I’ve got 15 years away to retire so I’ll keep adding money monthly on a steady basis and if there’s a market crash I’ll treat like a boxing day sale two for one i guess , like i read not to long ago about this topic that if in a market crash for example Apple shares went down 50% does that mean that the newest apple phone will be on sale for 50% less ? of course not same thing with Mcdonalds and every other blue chip stock.
I’ve got a question for you Mark and anyone on this site regarding trading options, I’m not interested and have no idea how it works but i heard couple of guys talking about it at work and i was wondering if anyone tried it before .
Gus, I have looked at options in the past. I had someone explain to me how it works and I find it rather complex. I haven’t gone into it and don’t think I ever will.
Rn, don’t think i’ll ever do it either it’s just that the subject was brought up by a coworker that claims that he would make a lot of money this way rather then traditional way of buy and hold strategy .
Gus, it’s easy to lose money with options. One needs to have the necessary knowledge on the complexity of how it works. Also it requires some monitoring. My friend makes money out of options. But it’s too complex for me to understand it well.
Agreed. Options is not a easy game to play!
Yes, every year or so goes by and people keep saying…there’s gonna be a correction, there’s gonna be a crash. Whatever. Nobody knows. That includes the experts!!
As for options, I don’t do it nor care to. This is a good video on it via Questrade:
Hope the link helps? An investing approach not for the faint of heart 🙂
Thanks for the video Mark, I forward it to my colleague at work but he still insist that he can read the market and can tell exactly when stocks will go up and down, I asked to borrow his crystal ball but he refused ?
LOL. I will be interested to hear his returns over time. Good luck to him!
Gus, options were invented as a risk mitigating tool but are given a bad name by speculators and greedy traders. For the last three years I have used covered calls and naked (cash secured) puts to turbocharge my dividend stocks portfolio up to 80%. Options are very versatile and could be used for different reasons. You need to design a strategy and follow it in order to be successful. I absolutely love options and recommend that every investor familiarize themselves with the topic and incorporate some of the strategies in their portfolios.
To be honest Pavel , if it’s to complex it’s not for me as I like simplicity in everything it’s just that it was mentioned at work and I haven’t had the chance to learn and read about it , but yeah regardless I’ll keep doing what I’m doing holding low cost ETFs because it’s working great.
Very timely post – my wife and I were discussing this topic only yesterday. I did a Google search on this topic this morning and there are posts on this topic from 2013, 2014, 2015, 2016, 2017, 2018 and 2019… Sitting on the sidelines risks never catching up.
Back in 2009, the market collapse really was traumatic but with contributions and growth since then it looks like a minor blip on the investing journey.
That was exactly the driver behind the article. I have emails from 2014 from people saying they were waiting to invest because they heard from their investing guru that a correction was going to happen. Too bad. They missed out on some stellar gains including 2019!!
I’m of the belief that the market always trends upwards. It may have its ups and downs throughout various cycles but will alway trend upwards. That’s why we invest in etfs, they may go up, they may go down but overall should trend upwards.
The price of stocks is like the price of a house. If you’re not looking to buy or sell it doesn’t really matter what the price is. We just set it and forget it with our market investments and it has been working well for us so far.
The only time I’ll be worried about the markets is when we get closer to wanting to start to drawdown from our portfolio. But that is many years away from now.
You know, it definitely seems that way Maria. Sure, in some years, equities looked very bleak. But, over multiple investing years it looks like long-term, as in 10- 20- or longer, the market does certainly climb to new heights!
Our drawdown plans are likely going to start in 5 years. So, we need to figure that out. I think I have a decent plan. Building the income-machine now!
I find it relatively easy to stay invested with a couple of moderate DB plans and a real healthy GIC ladder. 😉
Of course this doesn’t hold me back from watching for “sales”.
Watch for sales Lloyd, I do too, just doesn’t mean I can time them very well and I know that.
Excellent article. I totally agree and my wife and I have always been fully invested no matter what. To be honest, I’ve been thinking we were going to have a significant correction for a couple years now but still stuck to my guns and held everything. My wife and I had a total return of 26.56% in 2019 and are already up 3.7% this year. (not that total returns really matter that much to us being dividend income/growth investors but it’s fun to monitor)
It goes to show, that it is very difficult to predict the market in the short term but that it will most likely go up in the long term.
Thanks for your comment Don. You’re a great case study on what is working well with your portfolio. I still can’t believe how much things went up in 2019. 2020 isn’t over yet?!
A timely reminder, Mark. Thanks a lot.
My biggest mistake was not investing after having kids with a busy life. Better late than never. Two years in the market not long, but already made big difference in our financial situation, although everybody saying the market already too high two years ago when I started.
Hope I will be brave enough to stay in the market no matter up or down.
Sounds like a plan!
This is a big reason why I don’t watch the news (and tune out when folks in real life start talking about “the market”). I started investing after the 2008 recession and haven’t stopped since. We saw what happened to coworkers who pulled out of investing during the crash (and lost trust in the market), and part of staying the course is tuning out the noise in the media.
Very smart stuff Kim – not surprised! It will very interesting to see how investors in general, let alone any FIRE set, change their ways in the coming years if/when the correction hits.
Currently focused on building the dividend income war chest for those days ahead. Dividends (not spending any capital at all; assuming no growth from stocks or ETFs – just the odd dividend raise) likely account for ~60% or so of our necessary income needs in semi-retirement. We’re getting there.
We figure >$60k per year CDN or $40k-$45k USD per year in dividend income is enough to start semi-retirement with. We’ll start part-time work then.
How are things? Did you get your ticket for FinCon2020?
Doing well in Wyoming – I got my ticket for 2020 shortly after returning home from DC and haven’t made plans beyond that 🙂