It can be hard to stay disciplined in a bear market. In fact, the longer it goes on for, the harder it becomes. What’s more, the long-term cost of bailing out also increases. So the worst thing you can do is to capitulate when investor sentiment hits rock bottom. That’s just the mistke ALEX MOFFATT made after the global financial crisis... and he’s regretted it ever since.
Two unfortunate milestones stand out in my early investing life. The first was in early 2000, shortly after starting my first full-time job and the first time in my life I had some money to spare. Sadly, the market had almost reached the peak of the dotcom boom at that point and I had to watch my modest investments go into rapid decline.
The second was in 2011. I had kept calm as the global financial crisis shook the world in 2007 and 2008. But in late 2010 the crisis became distressingly vivid as Ireland, my home country, teetered on the brink of economic collapse and had to be bailed out by the EU and the IMF. At some point in 2011, overwhelmed by the sense of impending doom, I panicked and sold all of my non-pension investments. Fortunately, that didn’t amount to a vast sum but I had endured major losses by selling somewhere toward the bottom of the market. It was an expensive way to buy peace of mind.
The secret of investing, at once ridiculously simple and impossibly hard, is to buy low, sell high. I had succeeded in bookmarking an inglorious decade by buying high, selling low.
In retrospect, though, I wasn’t guilty of any error in buying high; it was selling low that was the blunder. Why do I say this? Because market timing is impossible. Had I decided back in 2000 that the market was a bubble and kept my spare cash on deposit, I would have been gambling. Even an inflated market can keep growing, sometimes for years on end. I could have been stranded on the sidelines while the market rose steadily. I was unfortunate, but blameless.
But selling everything during a severe downturn was undoubtedly a blunder. Had I kept my nerve and managed to stay disciplined, all the losses would have been recouped, followed by year after year of bumper gains.
Vanguard’s Jack Bogle once said: “Sure, it would be great to get out of the stock market at the high and back in at the low, but in 55 years of business, I not only have never met anybody that knew how to do it, I’ve never met anybody who had met anybody that knew how to do it.”
The long view
What we do know, however, is that over the long term, the stock market has consistently provided an excellent return for investors. So, as finance blogger Nick Maggiulli urges in the title of his recent book, the surest way to maximise returns is to “Just Keep Buying”.
Irrespective of whether the market is rising or falling, carry on investing and over the medium to long term, you should come out comfortably ahead. Stay disciplined.
Indeed, the surest way to hobble your investment performance is to try to time the market. There are studies that have compared the performance of individual investors with major stock indexes such as the S&P 500. Individual investor performance tends to lag several points behind the indexes.
What went wrong for those investors? Most of them will have been, in one way or another, trying to time the market. So, like me, they pulled money out when the market plunged, then missed out on the gains when it rebounded, reinvesting too late. Or they held off investing because they thought the market had risen too much, and missed out as it nevertheless continued to rise. Although it can require a strong stomach, buy and hold is ultimately the safest, smartest bet.
The past ten months or so have been one of those times when a strong stomach is badly needed. After so many years of impressive gains (aside from a hiccough in 2018 and the blink-and-you’ll-miss-it Covid crash), we are now living through a sustained period of losses and bad news. We might be near the bottom, or things might get a whole lot worse.
Anybody who tells you they know what’s going to happen and when is either deluded or a liar.
The world’s most unlucky investor
Still, even an experienced investor who is rationally fully aware of all this won’t be immune from moments of panic in a turbulent market. You wouldn’t be human not to feel depressed to invest and then watch the market plunge 20 per cent in the following weeks and months.
Anyone feeling that way could take a lot of comfort from a recent post by Charlie Bilello, CEO of Compound Capital Advisors. Bilello takes the example of a fictional investor with the worst judgment in history.
Bilello gives this fictional investor, Wally, $130,000 to invest, and Wally invests it piece by piece, in 13 instalments, each a lump sum of $10,000, in a diversified S&P 500 index portfolio. The rule is that once the money is invested, he can’t withdraw it or move it. The first investment is on August 2, 1965, the day the stock market topped before beginning a 21 per cent decline that only hit bottom in October 1967.
He proceeds to have similar bad luck 12 more times, always investing at precisely the worst moment, just before a plunge. This carries on right up to February 2020 when he invests his final $10,000 just before the Covid crash.
Hitting the jackpot
So how has this ridiculously unfortunate investor, the worst market timer in history, fared when he checks his portfolio in August 2021? He has a fortune of $18.6 million. As Bilello explains: “This was a 143x increase from the initial $130,000 and a 10.5 per cent dollar-weighted annualised return.”
Bilello accepts he has simplified the calculation by not factoring in fees, commissions or taxes, and by allowing Wally to invest in an index fund before such funds existed. But the point is that this investor could achieve an astonishing return despite his comically terrible timing.
Investing will always be highly risky in the short term. As Mark Twain warned: “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March and June.”
To succeed, stay disciplined. Ignore the latest headlines and what the pundits are saying. What matters is getting invested, staying invested and having a well-diversified portfolio.
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