It’s been said that perfection is the enemy of progress. You might be feeling like we haven’t seen a lot of either in 2020 but take a closer look. Overall, the stock market has recovered nicely, despite the challenging economic year we’ve faced. With COVID-19 vaccines on the horizon and the presidential election behind us, we’re building momentum and confidence in the year ahead. This has many investors and potential investors coming out of hibernation and either fearing they’ve missed out on a once-in-a-lifetime opportunity or wondering if now’s a good time to get into the market.
Fears like these about investing typically fall into what I call “missed the boat” syndrome; a cousin to “market timing” syndrome. These cousins belong to the common family of investor pitfalls.
Investors giving into these behavioral patterns remain caught in these cross currents, wondering if today’s the day to invest. Or, if the market has recovered, maybe this isn’t a good time to get started or jump back in. Worst of all, what if you shell out your hard-earned money and the markets go nowhere? What if they remain flat for a year or two or five years?
The myth that you can perfectly time the market is perpetuated by the media and stories of tycoons who’ve supposedly “mastered” the art of buying and selling. It’s also heightened during Black Swan events like 9/11 and the global pandemic we’re experiencing right now.
We can all recall a moment when we timed something perfectly. Maybe you invested in a company and the stock soared or you sold a home right before the market tanked. Truth is, when it comes to investing, it’s certainly possible to time some things right, but it’s utterly impossible to time the market perfectly over and over again. And research shows how missing even just five of the best days in the market can dramatically negatively impact your portfolio’s performance.
So, let’s talk about the misnomer of flat markets and the madness of market timing. Here’s a brief history lesson on two periods of time that seemed to be flat markets, until you look under the hood and see what really happened.
The Dow 10,000 to 10,000 round trip
First, let’s tackle the belief that you can’t make money in flat markets. I was in the formative years of my investing career when the Dow Jones Industrial Average closed at 10,000 on March 29, 1999. It was a magical day at the office! People were wearing Dow 10,000 celebratory hats, and there was so much promise for the market.
Fast-forward 10 years, and investors felt beaten up after having gone through the burst of the technology bubble, 9/11, two bear markets, and then the Great Recession. On the surface, the Dow was still hovering around 10,000, but that only told half the story.
In February 2000, the Dow had climbed past 10,000 to 11,000. Eleven years later, in September 2011, the Dow was at 11,000 again. Flat, right? Actually, for those investors who reinvested their dividends, the Dow Jones total return was up roughly 40%.
Similarly, the S&P Index was down by about 15%, as far as the index level was concerned in this time frame. But if you were an investor who collected your dividends and reinvested them, it was actually positive by more than 4%.
The lesson here is a flat market isn’t necessarily flat if you’re earning dividends and reinvesting them over a long period of time.
Timing isn’t everything — consistency is
Now, let’s continue to debunk the myth that there’s a perfect time to invest. During the 17 years spanning 1966 to 1982, the markets were essentially considered “flat.” Overall, the Dow was down about 14% in these 17 years. The S&P 500 was up about 18%, which is a gain of about 1% a year, but again, that’s price only. However, if we go back and count the dividends and their reinvestment, the Dow was positive by 82% and the S&P 500 was up a whopping 130%. That’s a compound annual rate of return of a little over 5% a year for the S&P 500.
Now let’s look at this in a different way. During this period, there were five market corrections of more than 24%. This allowed consistent investors to purchase stocks at discounted prices, or practice what’s known as “dollar cost averaging.” Using this 17-year stretch as an example, what if you had systematically invested $1,000 every month for 17 straight years? That would be a total investment of $204,000. What would your account value have been at the end of 1982? Close to $440,000, which is an over 115% return on your investment. And remember, you didn’t plunk all that down at once — you systematically contributed $1,000 time and time again. You would have ended up with an annualized rate of return north of 8%.
So, even in times when markets are viewed as flat, staying the course and systematically investing allows you to buy into markets when they are on sale. Even in seemingly not-so-good periods of time, as long as you have the discipline to stick with it and continue to invest year after year, history has shown you can potentially make a significant annual rate of return.
Bottom line
Markets that are “flat” for long periods of time can actually make investors significant returns when you consider the dividends you receive, the reinvestment of those dividends, and allow for the magic of compounding to take root over time. Of course, it’s human nature to want to get the timing just right. But zoom way out and look at investing over a long, disciplined period of time. Then, it doesn’t matter if you invest on a Monday or a Friday, this month or next — it matters that you’re in the game and consistentlyadding to your portfolio.
I hope that this history lesson puts the question of “when to invest” into context for you. Set aside the question of, “What if we have a ‘lost decade’?” Both of the time periods we examined were very difficult for the general market; however, we looked at both the Dow and the S&P 500 and we learned that investors who stayed in and played the game still made money over time. Even in the most difficult periods of time. So just imagine if the next 10 years are considered prosperous.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than 10 years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
Read the original AJC article here.
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