Waiting to Invest? Don't.
Key Takeaways
Putting money to work in markets allows us to support human ingenuity and get paid for it — either by lending it to companies (via bonds) or by being a shareholder (via equities) through the participation of new product creation, innovation, and ideas that companies offer.
In the simplest terms, by not investing, you risk outliving your money.
Don’t let the fear of “losing it all” or trying to find the perfect time to enter the market stop you from getting returns, especially when there are viable solutions to avoid these issues.
My advice is to never do tomorrow what you can do today. Procrastination is the thief of time.
If investing has taught us anything, it is that it is necessary to invest in order to meet long-term goals, such as maximising your retirement income or having enough to distribute to loved ones or charities when you are no longer around.
Once you start to understand how markets work, your belief, and optimism, about investing will rise. For instance, markets work and prices are fair. This is because when you execute a trade, it allows both the buyer and seller of the security to agree on the price. If either felt that the price was unfair, then a trade would not have been executed. So when markets are going down and prices are falling, it does not mean that everyone is selling and nobody is buying. The fact that there is a reported price means that deals are being transacted and agreed upon.
Markets also allows all of us to invest in human ingenuity and get paid for it. We put our money to work — either by lending it to companies (via bonds) or by being a shareholder (via equities) to participate in the new products, innovations, and ideas that these companies offer. Companies that don’t use this capital well, will get punished with a decreasing share price (with diversification helping you to reduce risk), and conversely, those who use the capital well, get rewarded with increasing share prices.
So if you are on the sidelines waiting to invest, don’t. Get off the benches and into the game (with an evidence-based approach of course). It is natural to fear risk when it comes to investing.
On the other hand, have you considered the risk of not investing?
Unless you have billions sitting in the bank (and even then, billionaires are still invested), by not participating in investments, you are risking today’s money having lesser value in the future (due to inflation). Most people don’t have enough money saved to be able to live adequately in retirement without earning some kind of investment return. In the simplest terms, by not investing, you risk outliving your money.
Figuring out when is the best time to get in or out of the market can also lead to procrastination. We are paralysed to act because of the fear of finding out that we bought at a higher price and sold at a lower value. Don’t forget in order to be right, you need to get both decisions correct. And if you string together a few trades, then the probability of success just keeps getting lower. Engaging in trading frequently can cost you your hard-earned retirement fund — a long-term solution is the best way to secure a comfortable future.
However, if you were wondering whether we could see the continuation of the market recovery from 2023, the chart below shows that global stocks (represented by the ACWI) are currently in a strong uptrend. When the longer term trend is positive (light blue line), stocks can continue rising for 6 months and more. As such, we are likely to see a continuation of this theme.
Another reason for holding back on investing would be the fear of losing all your hard earned money in the market. And fair enough, if you’re lucky enough to live and invest over a long period of time, you’ll definitely face big market downturns. But that fear doesn’t have to hold you back — you’re much more likely to “lose it all” with concentrated investments than with a well-diversified portfolio. That is where asset allocation comes into play as well — holding bonds in addition to equities in your portfolio helps to buffer the volatility and downside; even more so when they’re all across the globe.
The chart below shows an example of what happens when markets undergo a large sell-off. We compare the performance of the global consumer discretionary sector (which is a concentrated slice of the stock market) VS a globally diversified stock basket VS a GYC VaR 10 portfolio which held 50% in global stocks and 50% in global bonds.
You will see that a concentrated sector loses more than holding a more diversified basket of stocks. The investment portfolio which held bonds (our GYC VaR 10) lost the least, and sustained lower volatility. So if you are afraid of losing it all — definitely avoid putting all your money in one company or even a handful of securities.
At the moment, global markets are beset with worries. New geopolitical tensions are popping up, Chinese economic data is lacklustre, and the US presidential election is on the horizon.
However, many underlying indicators of the market are showing strength after the positive months of Nov and Dec 2023. With the probability of recession and inflation expectations low, there is no need for central banks to continue the aggressive rate hike cycle of the past two years. Couple this with investor pessimism, and a reluctance to dive back into equities, this sets up the market for a good run in 2024. Proper risk management and allocation will help ensure that any possible losses are contained within reasonable parameters. So there is no need to wait for clearer signs to invest.
For more information on what we have written above, come and have a chat with us.
