Most investors realize that it is not a realistic effort to enter the market by always buying low and selling at a high price. However, even with this knowledge, if you have a considerable amount of money to cash in, the thought of investing when the stock market is sliding to the highest level of all time can stop you. Similarly, when faced with a “buy-in” price (remember March 2020), few investors have the guts to do so.
As reasonable as these examples may sound, they both describe aspects of market life. Despite the recent decline in the US stock market, the S&P 500 has already set 20 new records in 2021 և two very strong years are coming. So what to do if you have cash to invest in և The market is strong.
Should I invest when the market is high?
Sitting in cash just because the S&P 500 sets new heights is wrong on several levels. First of all, when investing, it is very possible to make decisions based on long-term expectations, rather than short-term market movements. Second, the performance of the past does not indicate future results. Setting new heights does not necessarily mean that the market has reached its peak, the correction is near, just as a break in sharp sales does not mean that there is no time to fall.
Moreover, historical data do not support the idea that cash investments, when the market is high, are likely to have lower returns in the future. In fact, according to JP Morgan, investing in the days when the S&P 500 closed at a new all-time high could actually produce better Earnings rather than investing on a day when the market has not set a new record.
Investing in new heights …
Source: JP Morgan¹
… against lowering the price
Investors may be surprised to learn that 5 years of accumulated earnings (depreciation) after declines in the stock market are lower than the 5 years of accumulated earnings after setting new highs in the market.
Source: Dimensional Fund Advisors²
This is not an apple-to-apple comparison, as the Fama / France US Common Stock Market Index is an extended representation of the entire US stock market, and the table below is much longer. However, as the S&P 500 accounts for 80% -85% of the overall US stock market as a whole, it is still a useful basis for comparison.
Market timing does not work as it does not say what the markets will do
Sale of Covid-19 ադարձ Subsequent reference
In 2019, the S&P 500 with total yield increased by almost 31.5%. This is three times the average annual yield of the index since 1926. There is no place except 2020, right? Wrong. Despite the Covid-19 epidemic, the S&P 500 got off to a strong start in early 2020. After reaching a peak on February 19, stocks began to fall sharply, eventually appearing on March 23, falling by about -30% per year, including dividends. By the end of 2020, the S&P 500 had set 33 new record highs, ending the year with a total yield of 18.4%.
In two years, the figure has accumulated by more than 55%. If you were to buy the stock at the peak of February 19, you would have to wait until August 10 to give up (the S&P 500 hit a new high on August 18), and by the end of the year you would have been up almost 13%. .
Financial crisis of 2008
Markets are usually not recovering as fast as they did in 2020. The S&P 500 peaked on October 11, 2007, before the Great Depression. If you invest at the highest level of the index, it will take about four and a half years to make up for your losses, և one year, until the S&P 500 reaches another new high in April 2013. The half-year period will be 14%.
Investing in a market is a matter of time, not market time
If you do not have a crystal ball, there is no way to predict how the market will move in the short term. However, historical data can provide useful context for defining a number of possible outcomes for the future. It’s called the middle ground.
There are three key factors to consider when investing in the financial markets when using this long-term lens.
1. History shows that as the years of investment increase, so does the risk of losing money.
That’s why we call it long-term investment. As the above examples show, the stock market has been growing over the last 95 years. However, anything can happen in a few months to years. Whether you are investing when the market is high or low, you should not pay too much attention to your income in the short run.
Sources: BlackRock; Morningstar. US stocks are listed on the S&P 500 և IA SBBI US Large Cap Index. Past performance is not a guarantee of future results. This is for demonstration purposes only and does not show any investment. It is not possible to make direct investments in the index.
2. In the last 20 years, 70% of the best days on the market have taken place within 14 days of the worst days.
You can not get one without the other. But if you try to put in the time, it can cost you dearly. So if you are afraid to invest because the market is up or down, consider the cost of missing the best days. Determining whether or not to invest well should not have much to do with recent market conditions.
Source: JP Morgan. The return is based on the S&P 500 Overall Yield Index. Past performance is not a guarantee of future results. This is for demonstration purposes only and does not show any investment. It is not possible to make direct investments in the index.
3. What is the alternative? Bonds and cash are not investments for growth.
If you are worried about stock valuation and are hesitant to invest, what are your options for using cash? Interest rates have been falling for decades, hurting bond yields. Savings account interest rates are minimal, so staying cash often means skipping. And remember. Many stocks pay dividends. Earnings can help offset losses when stock prices fall.
Also, keep in mind if the market does not fall as fast or sharply as you expect. How much time will you leave before investing? The risk is that you missed the growth and Finish cash investments when ratings are higher.
Ways to reduce the risk of investing at the wrong time
No matter what investments are made in the stock market of a recession or a high jump, the average value of the dollar can be an effective way to reduce the risk of investing at the wrong time. Unlike entering the market over time, with the average dollar value, you invest at a predetermined frequency, regardless of whether the market is high (or low) on a given day.
In personal finance it is not always what makes sense on paper. The management of the emotional response (e.g., sleeping at night) is a well-founded concern or not without limitation. Average dollar value can be an effective strategy in volatile markets or when you have a large amount of cash to invest in. Just make sure you set your investment plan in advance and stick to it.
Think outside the S&P 500
Diversify, diversify, diversify. The above examples focus on the S&P 500 as it is familiar to investors. But that does not mean that this is something that should be taken into account when investing. Diversification is the cornerstone of any risk-adjusted strategy to build and protect your assets. This includes thinking outside the S&P 500. Here’s why.
Assets տարբեր Asset classes operate differently under different market conditions. The risk-compensation range will also vary, as will current assessments. For example, JP Morgan reports that the forecast price-to-earnings ratio for the S&P 500 on March 1, 2021 was 42% higher than its 20-year average, while the Global Country Index (formerly the US) was 24% was high. . In other words, most stocks are now historically expensive, but international securities are less so.
Investing in asset classes (such as stocks և bonds) և within them (for example, medium և equity) is key to reducing volatility և asset ratio in your portfolio. It also helps investors reduce the risk of investing lump sums in the market right away, as asset classes will generally look different at the time of investing.
There are many other factors to consider when choosing what to invest in, but the point is, the S&P 500 is not the only option. To get an idea of how asset classes are operating over time և relative instability, consider the chart below, which shows the total revenue for 2005-2020.
The diagram shows US stock market (S&P 500), US bonds (Bloomberg Barclays Aggregate US Bond Index), J. global stocks (MSCI ACWI formerly USA) և emerging market shares (MSCI Emerging Markets).
Focus on what you can control
You can not control the stock market. But you can control how you invest in it, what you do in the fall. High savings rates, staying invested, staying true to the plan are important parts of building wealth and keeping it in the long run. Trying to enter the market in time, waiting for cash in the hope of falling, is like leaving your financial future to chance.