Here at Wolf Group Capital Advisors, we have noticed a strange phenomenon recently. It seems to have had its infancy in March of 2000, really grew in power during the financial crisis of 2008 and continues to this day. I am referring to the fact that many people that we talk with seem none too pleased that the stock market is trading at its all-time high.
Remember the good old days (think 1999 and earlier) when making money in the stock market was fun? Well, those days are long gone and seem to have been replaced by feelings of “what goes up must come down” and “it’s not a matter of if the market is going to crash, it’s when.” While these thoughts and sentiments are somewhat normal, they are not necessarily accurate or helpful to one’s long-term asset growth. Investing at the top of the market is obviously not as beneficial as investing at the bottom of the market, however, investing at a top of the market is typically not such a bad thing either. And when one considers the alternatives, the argument can be made that investing at a top of the market is actually a solid strategy.
When discussing matters of “conventional wisdom” I often like to look at various data (aka facts) to see how the facts compare with the conventional wisdom. For instance, let’s assume you were the world’s most unlucky investor and you decided to invest at the most recent market top in 2007 (right before the financial crisis of 2008 hit). Based on S&P 500 index levels, October 9, 2007 was the peak of the 2003-2007 bull market, so we will assume that date for the initial investment. If you had put $100,000 into the S&P 500 on that date, your investment would be worth over $149,000 as of early September 2014. These figures are based on the fact that the S&P 500 has had an annualized total return of 5.96% from 10/07/07 through 09/06/14. Based on the financial press we’ve heard since 2008, it’s hard to believe that even if one invested in the market at what many consider to be one of the absolute worst times in the past 10 years, the return would have averaged almost 6% per year, for the past 7 years.
In 2009, we heard from the financial press that financial assets would never recover. We heard that we should expect “a new normal” and that we should begin to expect equity rates of return of about 4-5%. What was noticeably absent during 2008 and 2009 was a voice of reason pointing out that stocks have always recovered from bear markets. Even history’s worst bear markets cannot compete with the market’s ensuing (and inevitable) broader upward sweep. The value always comes back.
As Howard Marks so deftly pointed out in his latest memo Risk Revisited, what we fear most “is the possibility of permanent loss. A downward fluctuation – which by definition is temporary – doesn’t present a big problem if the investor is able to hold on and come out on the other side. We can ride out volatility, but we never get a chance to undo a permanent loss.”
As simple as the above quote from Marks is, it is something that investors often don’t consider. When markets are decreasing, many investors become emotional. They tend to not think as rationally as they would in “normal” times. They engage in irrational behavior and think that there is a possibility that markets will go to zero and they will suffer a permanent loss.
However, taking a less emotional view, investors can sit back with a clear head and realize that they have time (and all of the ingenuity of global businesses and some of the world’s best global business leaders) on their side. This will lead to more level-headed thinking, which in turn leads to realizing that staying the course is the prudent decision.
It is helpful to keep in mind that in the past 60 years there has not been a 20-year period where the rolling stock market return has been less than 6%. This is to say, had someone invested in 1931 or later and left the funds invested in the market for 20 years or more, they would have achieved an annualized total return of 6% or more in every single one of these 60+ twenty year periods. To put this statistic in perspective, if an investor had put $100,000 in the stock market at any time from 1931 onward, and left this sum of money invested for 20 years or longer, the absolute minimum an investor would have is $320,713 at the end of the 20 years. This is a powerful statistic and one that I cite often because it illuminates the power of investing for the long-term.
If you are reading this article with a perceptive eye (and maybe a fine-tooth comb), you may have noticed that in the second paragraph I made reference to “the” market top as well as “a” market top. It is very important to point out the difference as we only know “the” market top after the fact. And there are many new market tops in a bull market. For example, on Friday, September 5th, 2014 the S&P 500 Total Return index hit its 118th new all-time closing high of this bull market. Rationally speaking, you would think that this would signal that there is nothing about an all-time high that says stocks cannot go much higher before a bear market begins. As for this current market, the fact that new all-time highs have a tendency to be greeted mostly by worries and concerns, as opposed to celebrations, signals to us that this bull market may continue.
The funny thing about market peaks is that the psychology can be viewed as similar to that employed during market bottoms. During market peaks you’ll often hear the typical “it’s different this time” phrase. Think back to the year 2000 when CEOs and analysts (and just about everyone else) were saying “the company doesn’t need profits, it only needs eyeballs on our website” because “it’s different this time.” Typically, you’ll also hear all sorts of buzzwords like “paradigm shift” and “synergistic gains” being overused in the financial media.
We seem to have an unrealistic desire to want to sell at the exact day of the market’s top and buy at the exact day of the market’s bottom. Once one concedes that this type of precise timing is essentially an impossible endeavor, it becomes apparent that the risks of being out of the market outweigh the risks of being in the market. As mentioned above, in early September, the S&P 500 Total Return index just hit its 118th all-time high of this bull market alone. The index first achieved a new all-time high back on March 28, 2013 and has a cumulative return of more than 24.3% since that time. An investor would have loathed the day had he sold at what he thought was “the” market top back on that day in March of 2013 when it was in fact, just “a” market top. The first of 118 (and counting) to be exact.
References:
http://www.crestmontresearch.com/docs/Stock-20-Yr-Returns.pdf
Disclosures:
This article is not an offer or a solicitation to buy or sell securities. The information contained in this article has been compiled from third party sources and is believed to be reliable; however its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes the judgment of Wolf Group Capital Advisors as of the date of this report, and are subject to change without notice. Investing in securities is speculative and carries a high degree of risk. Past performance does not guarantee future results. Article is prepared by: Wolf Group Capital Advisors Copyright © 2014, by Wolf Group Capital Advisors; All rights reserved.