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THE KNOW: "I'll invest when the market crashes"

October 5, 2018
TAKEAWAY OF THE WEEK
Why waiting for markets to crash before investing is a losing game

With Wall Street’s longest bull run on record, many readers have asked if they should wait to invest.

No one likes to be the schmuck who invests at the peak, only to watch their investments tumble the next day, and month, and perhaps years.

Meet Bob, the investor we all try not to be. He’s the worst market timer in the world and only invests right before the market crashes.  

(Case study from A Wealth of Common Sense, adapted by endowus)

  • He started investing at the end of 1972 with $100,000,  right before the US market fell almost 50% over the next year.
  • He then invested $100,000 in 1987 (after 15 years of saving), right before the market lost over 30%.  
  • His bad luck continued: He invested $100,000 at the end of 1999, just to see the market lose half its value again.
  • His final investment before he retired was made in 2007, where he invested the $100,000 he had been saving since 2000.  The markets delivered him another >50% loss.

Poor Bob was also unlucky in life.

At the beginning of 2009, after the markets were down 51% since his last investment, Bob was on a ski vacation and had a bad fall. He needed to have a hip replacement, and when he got home, found that his house had burned down.

Bob looked to his investment portfolio and was surprised to discover that he was actually a multi-millionaire - $2.44 million to be exact. He made 6.1x his money despite his terrible luck with a 7.98% annualised return (IRR).

Thinking about inheritance, Bob did not touch his hilariously poorly timed investments and instead decided to live with his children and claim insurance for his hip replacement. As of end September 2018, Bob’s holdings would be worth $11.8 million, 29.6x his initial investment, with a 10.28% annualised return (IRR).

Bob wasn’t such a schmuck after all. He saved diligently and never panicked, which allowed the power of compounding to work for him.

In fact, Bob did a lot better than many of us. According to JP Morgan’s Guide to Markets, the average investor had a 20-year annualised return of 2.6% as of June-end 2018, likely due to speculation and poor investment behaviour.

Market timing is the holy grail of money-making - who doesn’t want to buy low and sell high?  But it is impossible to get right consistently. You’re investing for the next decade or two, not the next month or year.  When the powerful financier J.P. Morgan was asked what the stock market would do next, his answer was “It will fluctuate.” Look at the long-term trajectory of the markets rather than short-term fluctuations.

It’s about time in the markets, rather than timing the markets.

If you hold cash for long enough, you will eventually see markets decline. But you’re betting that you know when the markets are near a peak or trough, and that the pullback will compensate you for the close-to-zero return you’ll get sitting in cash, and that you’ll have the discipline to put money back to work when it falls by a certain level, even if everyone else is taking it out.

Pundits have been predicting for years that a market crash is right around the corner. They’ll eventually be proven right because that’s how markets function. Worrying about investing at the peak of the market is distracting you from what you should really be thinking about: positioning yourself in the markets for the long-term to have the greatest chance of success.

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