Could markets drop by 15-20% in the next few months, probably? Should you change your portfolio, switch to cash or hold off investing for the moment, probably not.
Using the S&P 500 as a benchmark it was up over 17% between January 1 and mid-April, that’s a great run. Granted the movement in the euro/dollar had an impact on the growth for us here in euroland. Since mid-April the S&P is down about 6.5%. The first few months of the year have been turbulent but moving upwards with considerable momentum.
Conversations with clients recently have often been about whether to hold off investing or taking some profit off the table.
Firstly what you need to remember is that when you put together a well-constructed investment portfolio it is built into that construction that there will be good days and bad days, good runs and bad runs. Long term investors should not, ever, try and time those ups and downs.
When markets have a great run there are always calls that “it is about to fall apart”, “this can’t continue”, “it’s gone too far too fast”. You know what these calls are absolutely correct the market will drop significantly at some stage but the question is when.
Imagine last October 1st you had money to invest, by the middle of the month markets were down about 6% and you said to yourself this is when the big 15-20% drop is going to come I am going to wait until it does and time my entry perfectly. But then it only drops by 5% and starts to climb again, so you wait.
By now you would be up over 20% if you had of just invested on October 1st.
Granted if you got your timing perfect you would be up a bit more, but, and this is the important bit. For the long term investor it will make very little difference in 5,6 or 7 years times how perfectly you timed your entry.
Just look at the last 5 years on the S&P 500, there have been at least 10 times when markets have dropped more than 5%. Does timing make a much difference over the long term, no.
It’s all just noise.
Even the most unlucky investors who got in right at the top of the market before the global financial crisis when apparently the world was entirely broken and would never be fixed again are up over 90% today.
I am not concerned for my clients having bad days, months or even years. I am expecting they will. I am also expecting we will have exceptional years. The key to long term investing is that you know and you understand that it will always revert back to the average.
My model portfolio 4 for example is expected to return 6.7% per annum, the fact that the benchmark we are looking at here can do 17% in a few months means at some stage this will need to be corrected.
Yes markets are going to have a bad run sooner rather than later, but don’t worry about having a bad day. What you really need to worry about is missing the good days, the chart below shows what happens over 40 years if you miss just a few of the best individuals days. You can cut your return significantly, Compound that and it becomes devastating. In the example instead of turning €1000 into €77,739 by investing the S&P 500 between 1970 and 2013 you could turn it into just €18,529 by failing to participate in just the 25 best single days in that 40 year period.
As a long term investor don’t try and time the market, it’s all about time in not timing.
There are a few exceptions to this, if you know you are going to need your money soon then you need to chat with us. Or if you feel your long term goals have changed or a life event has shifted your attitude to risk then talk to us. Or if you do feel you absolutely need to do something then come talk to us about turning down your risk level but not coming out of the markets altogether.
There are some tricks when investing new money into a market that is expected to fall so call us and we will talk you through them too if you have money to invest.
This is a general blog and can’t be taken as financial advice because everybody is different. If you are worried talk to us about your investments. But please be left in no doubt markets are going to take a hit.