Don't Wait for a Bear

16 June 2017  |  Dr. Ella Rabener
Don't Wait for a Bear
Investors are often keen to wait for a crash before investing in capital markets.
A quick look at historic market movements shows that this is not a good idea. When it comes to long-term investing, you should always start as early as possible.

Inevitably, it happened again. We recently held a seminar during which we presented our digital wealth management service and risk management technology. In the foyer at the end, a gentleman approached my colleague and me wanting to know the precise details of how his money would be invested. He asked about which ETFs we invest in, how often we change our ETF selection and how he can monitor his portfolio. In summary, he declared us: “a really great proposition”, but he thought it would be better to wait a bit before he opens his portfolio: “markets have been going well for so long, there will inevitably be a crash soon.”

Investors often wait for a crash before investing, in an attempt to buy when prices are low. It’s an argument we have heard before but not one we are convinced by. To understand why let’s look at an analysis by the US asset manager First Trust. It looks at the bull and bear markets on Wall Street since 1926.

The Long Run of the Bulls

Performance of the S&P 500 from 1926 – 31/03/17 (indexed to 1 at 1926)

Performance of the S&P 500 from 1926 – 31/03/17 (indexed to 1 at 1926)

Source: First Trust Advisors L.P., Morningstar. Returns from 1926 – 3/31/17. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S.stock market performance. Value development including dividends.
Definition of a bull market: starts at the lowest point after a downturn of 20 percent or more.
Definition of a bear market: starts at the highest point before a downturn of 20 percent or more and lasts until the low point of the downturn.
Past performance or future projections are not indicative of future performance.

The study shows:

  • On average, a bull market lasted 8.9 years with an average cumulative return of 468 percent.
  • The highest annualised return during a bull market was 34.1 percent.
  • On average, a bear market lasted 1.4 years with an average cumulative loss of -41 percent.
  • The lowest annualised return during a bear market was -47 percent.
  • The longest bull market lasted 15.1 years and saw an increase of 936 percent.
  • The longest bear market lasted 2.8 years and saw a loss of 83 percent.
  • The current bull market has lasted 8.1 years so far and has seen an increase of 282 percent (as at 31/03/2017).
  • Four bull markets have lasted longer than the current one and have seen higher increases.

The last turquoise triangle in the chart represents the current bull market. It is not a small triangle, but nor is it as large as some of the others. What does this mean for an investor considering entry into the capital markets?

It means, don’t wait. Just because markets have had a good run for a few years does not necessitate an immediate crash. In fact, one could have used the same logic to predict a crash one year ago and we know that investors who stayed put have earned a decent return since then. Half of all former bull markets lasted longer than the current one. Prices rose throughout the longest stock market boom which lasted a mighty 15 years. Anyone currently waiting for a break in the run is at risk; by standing on the sideline they could miss out on significant price increases. This risk of missing out is higher than the risk of a downturn (see our article: There Is No Sideline When It Comes To Investing).

It’s Worth Investing Early

At Scalable Capital, we do not position ourselves according to simple stock market rules; the current length of a market upturn does not matter to us. No one actually knows what’s around the corner so for the long-term investor, the earlier they invest in capital markets, the better. Interest rates on cash don’t do those savers holding out for a market dip any favours.

We also offer investors dynamic risk management. To put it simply, we do not forecast the exact direction and magnitude of price changes in the markets. Like anyone else, we don’t have a crystal ball. Instead, we forecast market risk which can be predicted much more accurately. This means that we cannot eliminate the risk of loss but we can keep it in check by reacting to signals for changes in market risk early on. If markets do crash, our clients’ downside risk will be under control.

The reluctant investor may find it expensive to wait for the next bear.

Source: https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=4ecfa978-d0bb-4924-92c8-628ff9bfe12d

Image: Unsplash/Adam Willoughby Knox

Risk Warning – With investment comes risk. The value of your investment can go down as well as up and you may get back less than you invest. Past performance or future projections are not indicative of future performance. We do not provide any investment, legal and/or tax advice. If this website contains information regarding capital markets, financial instruments and/or other topics relevant for investments of assets, the exclusive purpose of this information is to give general guidance on investment management services provided by members of our group. Please note our Risk Warning and the Website Terms.

 

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Photo Ella Turquoise Circle
Dr. Ella Rabener
CMO & UK CO-FOUNDER
Ella combines finance expertise, completing a doctoral degree in business and advising leading financial institutions while working with McKinsey & Company, with several years of experience building e-commerce startups, most recently as founder and CEO of Westwing.ru.