A number of clients have been asking me over the past few months whether now is a good time to invest? Markets have been reaching new heights which surely must mean that a correction can’t be far away. As you know, I do not believe in market timing but even I have been keeping some cash to one side, in the hope that I may be able to take advantage of any such correction when it does come.
The following reminds us all that if we have a reasonable time horizon, we really don’t need to worry about whether the markets are at record highs or not.
It is a hypothetical example of someone who entered the markets at all the very worst points over the past 47 years; it’s interesting how it turns out.
By Buz Livingston
“In Ben Carlson’s blog, A Wealth of Common Sense, he takes a casual look at the worst market timer for the last half-century, Mr. Bob. Even though bad luck stung Mr. Bob, he devised a good plan, saved prodigiously and, most importantly, had guts. When it comes to investing, your most valuable organ is not on top of your shoulders.
Mr. Bob began work at age 22 in 1970 and planned to save $2,000 annually then invest when the time is right. Every decade he also intended to raise his annual savings by $2,000. In December of 1972, he made his first investment ($6,000) just in time for 1973-1974 bear market. After being shocked, it took Mr. Bob almost 15 years before he invested again, but he kept saving and had $46,000 to invest in an S&P 500 index fund in August of 1987 just before 1987′s Black Monday.
While he didn’t panic and sell his index fund, he kept saving; the third time is the charm he thought and held off buying shares until December 1999. Again, he purchased at the market peak just before the technology bust in 2000 and even put more money, $68,000, in the market. Mr. Bob thought about Buck Owens’ lyrics “The sun’s gonna shine on my life once more ...” and stuck to his plan, kept saving and stayed invested. Almost eight years later, he had $64,000 to spend and made the plunge in October of 2007, or perfect timing for The Great Recession.
When Mr. Bob decided to retire, you might not believe it but he had over $1.1 million saved. Mr. Carlson is Chartered Financial Analyst so I trust him with the math.
Sure, this exercise is purely hypothetical. Sharp-eyed observers likely noted there were no S&P index funds in 1972 and I freely admit a 100 percent stock portfolio is rarely appropriate. Carlson’s exercise demonstrates persistence and patience are your most valuable assets. Time in the market beats timing the market. To invest successfully, be an optimist. Losses will occur, rest assured but being an optimist keeps you on track.”
The main factor at play in this example is the length of time over which Mr Bob was investing, 40+ years, providing plenty of time for recovery after each disaster!
Many of us may not consider we have a 40-year time horizon over which to invest but don’t forget, if you are not planning on buying an annuity with your pension fund, your investment time horizon is probably the rest of your life – I hope it is 40 years!
If you have any concerns or questions about any finance related matter (but not politics), please do not hesitate to call me at any time.
With best wishes,
Graham Ponting CFP Chartered MCSI