Of course, I’m kidding. We are not selling our stocks and we are not preparing for doomsday. But, did my sensational title get your attention? I thought it might! The financial media is really good at grabbing our attention by using fear to entice more people to read their articles. So, I thought I’d try my hand at it too. I must admit, it’s kind of fun…
In all seriousness, you may have noticed the media has given plenty of attention to the Dow Jones Industrial Average index as it hits record highs. When the Dow Jones broke through 20,000 in January it was the lead story on virtually every news network. With the market hitting new highs virtually every month, news outlets have pounced on the opportunity to warn investors of the looming downturn.
So, I thought it would be interesting to go back and see what I was writing about in January. Sure enough, my Q1 newsletter in January was inspired by a potential client who was having concerns about investing in the currently “over-valued” market. (The article is entitled “When should you invest?” from the Q1 2017 Newsletter.)
If you’re a client of ours, you’ve probably heard us preach about why markets can’t be timed or predicted. (If, by chance, you think that markets can be timed, click here to view a short video produced by our friends at Dimensional Funds about market timing.) Last week I attended a CE seminar and stumbled across some statistical information that I quickly scribbled down on my note pad. Unfortunately, I don’t have the actual slide to share with you so I thought I’d humbly share my handwritten notes with you. I hope you’ll excuse my artistic inability.
The chart above compares negative returns and positive returns in the S&P 500 over various time periods. For instance, on any given day the market has a 55% chance of being up. So, if you’re trying to pick one day over another day to invest in the stock market, it’s essentially the flip of a coin. However, over longer periods of time the chances of experiencing a positive return greatly improve. Historically speaking, if you put money in the market for 5 years or longer, you had an 83% likelihood of experiencing positive returns.
So, the question that I posed in my previous article still stands… When is a good time to invest? But, based on the above information, the timing of when to get into the market isn’t really all that important. I think the more appropriate question to ask is, “How long should I be invested in the market?” If we consider the amount of time spent in the market, we can answer the question with much more certainty. The more time an investor spends in the market, the more likely they are to experience a positive return.
Source: Apollo Lupescu, PhD, Vice President of Dimensional Fund Advisors’ Effective Communication Workshop