We received a question from a community member regarding the recent stock market rally and the noise surrounding a possible tech bubble. Specifically, the member wants to know if now is the time to continue adding monthly to the stock market or if it’s better to hold cash and wait.
In other words, should one adjust their plan of adding to the market monthly if there is a risk of a “bubble”?
Essentially, the question revolves around timing and whether there is a perfect time to enter the market. Unfortunately, we cannot provide a precise answer, only our opinion, which we try to base on historical data and probabilities.
Can You Time the Market?
We recently conducted a study comparing the returns of the S&P 500 with other asset classes, namely gold, real estate, and corporate debt. The aim was to highlight the superior returns of the market versus other asset classes. However, an interesting finding emerged from the study:
If you invested money at the beginning of any year, going back to 1973, and held your investment for 10 years, there were only two instances you would have lost money: from 1998 to 2008 and from 1999 to 2009. In other words, there was a 95% chance your money would grow if you invested it for 10 years in the S&P 500 regardless of when you invested it.
The weakness in this research is that it assumes you invested your money at the beginning of each year. So let’s delve deeper and see what would have happened if we had invested in the stock market at the beginning of any month since 1988 and held that investment for exactly 10 years:
NB! We have assumed that all dividends received during the 10 years are reinvested back into the market.
Interestingly, the math doesn’t change much! There is a 92.7% probability that you would have made money no matter what month you put money into the market provided you held it for 10 years.
On average, you would have earned just under a 10% annualized return with an 87% chance of beating inflation.
Those are pretty good odds, which argues for investing regardless of what the market might do in the near term.
As per the table above, The periods where you would have lost money or not beaten inflation were ALL lumped together, resulting from investing through the Dot.com bubble in the early 2000s and the financial crisis in 2008/09.
So what do we do?
We argue that the future is unknowable. Very few predicted the financial crisis of 2008 while perhaps the Dot.com bubble was slightly more apparent. So, it seems unproductive to try to predict the next crash. Furthermore, if we add to our investment each month, there will be times we are buying at the top of the market but also times we are buying at the bottom (during a crash) and based on history, we should expect an average 10% annualised return if we continue this process for long enough.
The evidence suggests that the odds are heavily stacked in your favour if we start investing today and hold that investment for 10 years. If we add to our investment each month then the odds of success in the long-term increase further still.