Is Now the Right Time to Invest?

Or, are we in a bubble?

The most common question our team hear after we tell people what we do in various social and professional settings is something along the lines of:

“Is now a good time to invest?”

While we hear this question often, especially when the market has had a sustained up or down period, we hear it even more. Recently we’ve had more clients asking this question as they invest new deposits from asset sales or life events.

Everyone has hunches, whether it’s us, economists, podcasters, other advisers, commentators, your uncle (who may have a strong opinion on everything!), the media, or investment managers. With international investment markets at-or-near all-time highs, many investors are concerned about buying near the peak and then facing a potential market correction. To clarify, market 'corrections' are typically described as a drop of 10% or more in share prices, measured by an index. This leads to a common question: 'Should I invest now, while markets are at an all-time high, or wait for the next correction before jumping in?’

A recent study analysed 98 years of S&P 500 returns to address this specific question. The research compared two strategies:

1. Investing when the S&P 500 is at an all-time high (‘Getting in at the top’), versus
2. Waiting for a 10% market drop before investing (‘Getting in after a market drop’).

The study sought to determine which approach, on average, yielded better returns.

The strategy of "Getting in at the top" obtained better overall returns than waiting for a 10% market drop, in most cases.

Of course, individual cases will vary. But those results seem perfectly logical when you think about it: markets are supposed to reach new all-time highs, that’s why people bother to invest in them! Markets, on average, go up. If today is an all-time high (i.e., ‘the top’) it doesn’t mean the markets will go down tomorrow. It’s more likely that markets go up to a new all-time high tomorrow, and the next day, and the day after that. Simply put, the data showed it was better to invest immediately, rather than delay. 

Still, in our experience the study didn’t address the true problem. The true problem with “getting in after a market drop” is “getting in.” The chances are, even if you miss a market correction by waiting on the sidelines, you’ll still need the gumption to invest when the market is down as the headlines are probably even worse! And what are the chances of that? Not great.

Put another way, the real problem is human behaviour.  

Predicting Short-Term Investment Moves Is Basically Impossible

Selected Headlines and Resulting NZX 50 Index returns

Encouraging some people to invest at all-time highs might be a challenge, especially if the news headlines seem to be telling a different story. Unfortunately, the news cycle of legacy media is designed to shock, more than inform, and relying on headlines isn’t a reliable basis for making investment decisions.

To illustrate this, consider the following list of headlines from New Zealand news outlets over the last 10 years. This clearly demonstrates how forecasts, even those provided by supposed experts, can be unreliable.

• 2015: “Bull run near end of tether” NZ Herald, 3 Jan 2015
  
  • ‍Index rose 14%

• 2016: “Global risks threaten market returns in 2016” NBR, 8 Jan 2016
  
  • ‍Index rose 9%‍
• 2017: “Why 2017 could be a tougher year for investors” NZ Herald, 30 Dec 2016
  
  • ‍Index rose 22%‍

• 2018: "Are you ready for the great stock market melt-up?" NZ Herald, 26 Jan 2018 ‍
  
  • Index rose 5%

• 2019: "The longest bull market in history looks to be over" NBR, 4 Jan 2019
  
  • Index rose 30%
• 2020: "Stock market not likely to replicate turbocharged 2019" NZ Herald, 2 Jan 2020
  
  • Index rose 14%
• 2021: "2021 is shaping up as a year of recovery and rebound" NZ Herald, 26 Dec 2020
  
  • Index declined 0.4%
• 2022: "The NZ market is relatively well-placed heading into 2022" NZ Herald, 28 Dec 2021
  
  • Index declined 12%
• 2023: "Outlook for 2023 - when will share markets bottom out?" NZ Herald, 29 Dec 2022
  
  • Index rose 3%
• 2024: "GDP preview: Hold the champagne, recession or not, we're going backwards" NZ Herald, 18 Mar 2024
  
  • Index rose 11%

^{Source: S&P/NZX 50 Gross Index. Returns calculated at each calendar year}

Investors who think market returns are predictable, beyond the general long-term upward trend, often sit on the sidelines waiting for a correction that might not come for months or even years. Meanwhile, statistically speaking, the market will climb while they wait. That is to say, the chances are the market will rise higher, not fall, before they make the decision to invest.

Then, frustrated by missing out on those gains, the potential investors become even more hesitant to buy! When the market finally does decline, the economic news is inevitably grim, so they decide to wait longer, hoping for an even steeper drop. But then the market rebounds, and once again they miss their opportunity altogether.

While markets are unpredictable, this behaviour is entirely predictable, and it's exactly the pattern we, as financial advisers, strive to help investors avoid.

Have Share Markets Reached a Peak?

Let’s expand on a concept we touched on earlier.

Has the share market reached a peak? Maybe. So what?

According to Joseph Darby, CEO of Become Wealth, “That's the entire point of the market! The market has no ceiling or absolute tipping point like the top of Mount Everest; the market rises because the underlying companies you own are growing and succeeding. All-time highs are more common and less daunting than many people think.”

There is no limit to stock market growth, which is why we see high after high. Don’t believe us? Here’s some more data:

• Since 1988, the S&P 500 has, on average, reached new highs 20 times per year. Nearly 85% of the time, one-year forward returns from these highs were positive.
• When analysing the S&P 500 Index since World War II, a fascinating pattern emerges over sustained investment periods, such as 15 years. The data consistently shows that, despite all the economic crises in that time: disasters, pandemics, innovation, elections, wars, peace, booms, and busts, there has never been a "bad" 15-year starting point where the market failed to provide positive returns.‍
• From 2010 to 2020, the media were constantly telling us we were due for a massive market pullback. The market didn’t listen to the media: the S&P 500 hit 242 all-time highs during this decade, generating a total return of about 256%. In other words, if you just invested at the start of the decade and forgot about it, your money would have more than tripled.

This isn’t something the media (and even some investment professionals) would have you believe. Pundits and commentators often give the impression you can only see great results if you invest at the perfect time, but this simply isn’t true.

We invest regularly in diverse portfolios of quality, worldwide top-performing shares and other assets with the intention of holding them for decades.

Trying to "buy the dip" or waiting because the market is "too high" means missing out. When you zoom out over usual investment timeframes of 20, 30, or 40 years, today's all-time high will inevitably be seen as one of the lowest points in the decades to come. Consistency always beats waiting.

Why Invest Now?

When our team of financial advisers recommend investing “now,” it’s not because we know for certain that “now is the perfect time to invest.” Rather, it’s because we understand that once someone falls into the trap of trying to forecast the market, they are far more likely to achieve worse results than if they simply invested whenever they had extra money and withdrew only when they needed it, without attempting to time the market at all.

The truth is, if you have a short-term need for any sum, the best place for it is probably not any investment, because of the chance that any investment focussed on long-term gains usually comes with the acceptance of the possibility of short-term declines in price. On the other hand, if you’re investing for the long term, price fluctuations over the next month or year are unlikely to matter much in the grand scheme of things.

Related material:

• How much should you invest?
• Investments you can own forever
• The best investments in a recession
• Is the ESG bubble about to burst?
• Where next for investment markets?
• Investment risk, defined
• What to do when your investment value falls

While past performance can never guarantee future results, the lesson from history is remarkably consistent: long-term discipline matters far more than timing the starting point.

Which brings us to perhaps the most important message.

Time Your Investment, Or Live Your Life?

Your life is far more interesting than the current state of the share markets. As far as we know, it’s the only life you will have. So, go out and enjoy it.

Before you rush away to do something more fun, there is something important to clarify here.

If you are investing in the way most readers will be, in a professionally constructed portfolio, which is appropriately diversified in a way that suits your objectives, you can have more confidence that simply by investing, and staying on course, over time, you’ll become wealthy or stay that way.

Alternatively, if you’re picking a range of individual stocks, or concentrating your investments in one or two areas, or trying to time the market, that’s another story! If this is the case, you have signed up for a different investing experience, where staying the course may not work.

By investing in a professional and diversified way, you can sleep well at night knowing that you will always have an appropriate asset mix for you. This means you can get on with living life.

The Bottom Line: Is Now the Right Time to Invest?

For nearly all long-term investors, the answer is simple:

• Yes. Because waiting for the ‘perfect’ moment usually leads to poorer outcomes.

No one can consistently predict market ups or downs. Fortunately, long-term investors don’t need to. In fact, history shows that even at market highs, research proves it is usually more beneficial to invest immediately rather than waiting for a potential downturn. What matters is avoiding the temptation to predict short term price movements or base decisions on popular economic forecasts. Instead, focus on sticking to a well-designed investment plan that aligns with your goals and time horizon.

It was the famous American investor Peter Lynch who put it so accurately,

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."

History says invest now, not later. Your future self will high-five you, so reach out today to book your complimentary initial consult and let’s make it happen!

Credit, this article is based on material from Consilium, it is reproduced with permission.