Clients have a variety of reasons why they may not be ready to invest. Sometimes, they may feel the timing is not right because the market looks choppy or is in the process of correcting. Sometimes specific tax reasons make it advantageous to invest at a later date. And sometimes, they have earmarked money for spending rather than investing. Investors should always complete a financial plan to invest according to their budgetary and tax needs. For portions of the portfolio allocated for longer-term investing, we recommend that investors resist the impulse to trade in and out of the markets.
Historically, it is not uncommon for markets to go through months-long corrections, only to rebound faster than expected. Since 1942, the average bear market lasted roughly 1/3 of the duration of the preceding bull market. Therefore, markets tend to spend more time rising than they do falling. It may be surprising to many; however, a large proportion of the gains are made in concentrated periods. For example, the first two tables show that if you were to put $100 in the S&P500 index on January 1980, your investment would have grown to $11,511 by April 2022. If you had missed only the 10 best days during this period, your $100 would have ‘only’ grown to $5,141 (1/2 of the return compared to the 1st scenario). The impact of missing the best 25 days is even more pronounced as your $100 would have ‘only’ grown to $2,348 ( ½ of the return compared to the 2nd scenario). These staggering gaps in growth are similar when investing in the TSX Index.
After the correction in April-June this year, people may be surprised to learn that S&P500 is still within the longer-term uptrend (as of Aug 19). Today, the S&P500 closed at 4,228 and sat around the midpoint of the up-channel, which started around March2009, otherwise referred to as the bottom of the Great Financial Crisis.
This bull market is sometimes referred to as the Most Hated Bull market. Many investors did not participate in this recovery by not fully re-investing back in the market after making the bold call to exit in 2008-2009. There have been many reasons to doubt the bull market and delay investing for the prospects of a ‘safer’ environment. The following is a short list of the major events that the markets have had to contend with:
- 2009 Financial Crisis ended
- 2011 European Debt Crisis
- 2015-2016 Shanghai Stock Market Crash
- 2018 Trade War
- 2020 Brexit
- 2020 Covid Pandemic
- 2022 Inflation
The difficulty of making money through stocks is not because market returns have not been attractive. Rather, the difficulty lies in the discipline to stay invested. The chaos that inevitably comes with the markets often prompts the rationale that one should wait for things to be “good” before investing. Investors must remind themselves that the market cares less about “good” and “bad” but instead focuses on “better” or “worse.” Moreover, markets tend to bottom when the uncertainty is most grim, rather than when everything is okay. By the time the signal is “all-clear,” markets may already be heading to new highs. To help us stay focused and disciplined, there are tried and true approaches that can help, like setting up a systematic deposit into your investment account. This is often referred to as ‘dollar-cost-averaging’ and can be done as a fixed monthly, quarterly or yearly deposit. Also, make use of your available RSP and TFSA contribution rooms. Not only do these accounts have tax benefits, they can serve as an annual reminder to invest in a disciplined manner. If you are unsure how to do this or need help creating a portfolio that you can dollar-cost-average in with confidence, call me or one of our team members.