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.
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:
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).
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.
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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