Back in July, billionaire Leon Cooperman said the market was overvalued, and overlooking “a number of things.”
And last month, “bond king” Jeffrey Gundlach warned he sees a stock market crash coming sometime within the next 18 months.
Meanwhile, SoftBank’s CEO Masayoshi Son just dumped $80 billion in assets to prep for “the worst case scenario of the pandemic.”
Before you get too alarmed, keep in mind – billionaires get market calls wrong all the time.
In 2019, 41% of billionaires who hazarded a guess predicted a market crash in 2019. And 48% predicted a downturn in 2020 – which means 52% of them got it wrong.
Even so, with central bankers having pumped trillions more dollars of cheap money into markets to prop up equities, I wouldn’t blame you for worrying there has to be a reckoning.
So is a crash around the corner? Your guess is as good as mine… but there are two reasons why in the long term, that’s not the most important question.
Yes, timing matters in investing. It helps to buy at rock bottom and sell at a multi-year high. But it’s not everything, or even close to everything.
Take this hypothetical example of a long-term investor who invested only at market peaks.
What would have happened to him?
Meet Phil, the world’s worst market timer
Phil is 58 today. He made his first investment in 1987, after seeing the FTSE roar almost 100% over the last three years.
Eager not to miss out any more, he put £10,000 into an index fund, buying with the FTSE at 2,366 on 1 September 1987.
Almost immediately, the FTSE begins to crash. It hits 1,713 the following December – a more than 27% loss in four months for poor Phil.
Naturally, he’s a little burned by the experience. But by 1 June 1990, the market is hitting new highs and he’s ready to try again.
He buys the FTSE at 2,374 that June, investing another £10,000 – and by September, it’s fallen to just under 2,000 again, a more than 16% hit.
In January 1994, however, the market has clearly recovered. It’s surged almost 85%, and Phil can’t ignore the euphoria any more. He buys the FTSE at 3,491 that month.
By June, it’s dipped to 2,919, another 16% paper loss in mere months for Phil.
This time, Phil is determined not to get burned again. He waits until December 1999, with the FTSE now brushing 7,000, before investing another £10,000.
Sure enough, the FTSE begins another catastrophic slide, hitting 3,313 by March 2003.
In October 2007, with the FTSE just about recovered, Phil does it again – and watches the FTSE go from 6,721 to 3,830, a 43% crash.
In December 2019, he’s ready to try again – buying the FTSE at its new high of 7,500. The FTSE closed at 6,555 yesterday.
Phil is the world’s worst market timer, consistently buying at peaks and watching his positions depreciate by double-digit percentages just weeks afterward, every single time.
So, how did he do?
Phil’s first £10,000 in 1987 turned into £27,704.
His £10,000 invested in 1990 is worth £27,611.
The £10,000 he put into markets in 1994 is now worth £18,776, and his losses (at least until now) from buying at the last three peaks total £1,582.
In other words – Phil has £72,509 after investing £60,000, for a 20% profit overall.
As Phil’s story shows, you can have almost comically bad market timing and still profit if you keep perspective during any downturn.
Looking at other markets, the Dow returned some 1,900% over the last 100 years, even adjusted for inflation. If two world wars and a Great Depression, along with all the other 20th century disasters didn’t stop it from posting those lofty returns, a brutal recession wouldn’t either.
Anyone investing in the Dow in September 2007 – the very worst time in modern history to invest – would have lost almost half their investment to the ensuing selloff.
But over time, they would have more than doubled their money, as the Dow went from 13,000 to 7,000 to 29,600 by today.
If you bought at the less than ideal time and didn’t sell in a panic, you’d be up over 100% just by matching the market.
Best of all, these numbers don’t include dividends.
If you’d invested in a company with great dividend potential, odds are you’d have been paid a growing income stream for the wait.
The second reason is that there are investing tactics that make buying at the wrong time less likely. You don’t have to invest all your money at once. You can divide it into thirds or fourths, and average in over time.
The bottom line is that the markets multiplied in value over the last century, accounting for inflation, despite decades of historic disasters. The problems of today won’t stop them in the long term, either.
Regards,
William Dahl
Editor, Southbank Investment Research
PS History shows that time in the markets beats timing the markets – but we also know many readers don’t have decades to wait. These are unpredictable times, with fortunes being made and lost week to week – which is why on Monday at 2pm, Southbank Investment Research is holding an exclusive online broadcast we’re calling “Britain’s Great Wealth Revival” – click here to see why.
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