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.