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If you left the market, don’t wait to get back in

There are only a few basic rules of investing.
Image: Spencer Platt/Getty Images

There are only a few basic rules of investing: diversify, keep your costs low and probably most important, hang on when markets tumble occasionally. The last one is the trickiest. It’s not easy watching money vanish as the market plunges, particularly when many people, some of them highly respected, are carping about the end of the world, which invariably accompanies a market collapse.

So it was when Covid-19 sent US stocks into a tailspin in late February. The S&P 500 Index shed a third of its value in just more than four weeks, one of the steepest retreats on record, amid widespread chatter that the pandemic would plunge the US into a long depression, wiping out whole industries and permanently damaging broad swaths of the economy.

Hanging on to stocks through that chaos was no small feat, and amazingly, most investors managed to do it. Research firm Dalbar, which attempts to track investors’ moves into and out of mutual funds, concluded in a recent report that “the average investor’s appetite for equities has remained unchanged throughout the Covid crisis.” Vanguard Group, which oversees more than $6 trillion in assets, found that less than 0.5% of its retail clients and self-directed investors in its retirement plans panicked and moved to all cash between Feb.19, the market’s pre-coronavirus peak, and May 31.

That’s a big change from previous meltdowns, most recently the 2008 financial crisis, when investors dumped stocks in droves. It seems to have finally sunk in that all crises pass and that the stock market eventually recovers, no matter how desperate things seem at the time.

And true to form, the market recovered sooner than anyone expected. It shot higher in late March and surpassed its pre-Covid high in August, even as the coronavirus showed few signs of slowing. As it turned out, the recovery began roughly eight months before news arrived that a highly effective vaccine is in hand and will start to be distributed soon. That sounds about right.

Those who dumped their stocks along the way, gambling that the market is poised for a long slump and would give them an opening to reenter at even lower prices, now face a hard choice. The market is up roughly 60% from its March low, so getting back in means coming to terms with a costly mistake. Say you had $100,000 in the market at the pre-coronavirus peak and sold roughly halfway down, recovering about $83,000. If you had stayed in the market, you would have roughly $107,000 today, or close to 30% more money than when you exited. That’s tough to swallow.

But the alternative is worse. The temptation is to wait stubbornly for the market to revisit its lows, a day that may never come. During the financial crisis, the market turned sharply higher in March 2009, even though it was not yet evident that a collapse of the financial system would be averted. When the all-clear came several months later, the market had risen roughly 60% through October.

Sound familiar? Investors who dumped their stocks during the financial crisis faced the same choice modern-day deserters do now. Those who jumped back in after the crisis eased in 2009 have more than tripled their money despite buying back at what must have seemed like an outrageous price at the time, while those who waited for the elusive ideal reentry are still waiting.

There are countless other examples. With rare exception, when the market surges from the depths of a crisis, it’s a signal that it has moved on, even if some investors have not. Chances are, the market has moved on from Covid-19, and investors should, too.

The next time — and yes, there will be a next time — investors are tempted to dump their stocks during a crisis, they should focus not on getting out but getting back in. That should clarify the wisdom of staying put. No one can anticipate the bottom in advance, which means that the reentry will either be too early or too late. And too early is unrealistic. If you’re tempted to run for the exit when the market is down 20%, you probably won’t be in the mood to buy when it’s down 30% or more. That leaves one alternative: buying late, which is the pickle some investors are in now. It’s best to avoid that quandary altogether by remaining invested.

For now, those who got out should recognise that there will never be a better time to get back in, at least one that can be known in advance.

© 2020 Bloomberg


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Why do I think this will not be over for the next four years or more.

The market has been good to me for the last 40 years and I am not about to kick it in the teeth now.

Always in quality stocks, follow the industry captains, made one mistake with brother Markus but I did make a little there. There was a point where I could have made a bundle but so be it.

The experts call it time IN the market not timing the market.

Ok I am ready for those that tell me I could have made a lot more elsewhere, off shore in bonds etc. Yes I am also invested there but the LSE has been good to me and will reward me again.

Anglo a few years ago at less than R100, Sasol the other day at R20 The days when Implats would rise R30 in a day, those days will return.

We have clumsy footed ham-fisted politicians that upset things as has the USA.

Can the stock market actually crash ? (over a prolonged period), because the remedy to a existential crisis/crash is short lived because of quantitative easing.

Penny stocks crash quality presents a correction and a buying opportunity.

I wish I had your confidence. I am never sure when to sell and when I buy I am always afraid I bought when the stock was to high.

It is easy to be a smart Alek when the market makes a new high after the previous crash when you benefit from the Jerome Powell Put. Be honest with your readers Bloomberg. Tell them how the Federal Reserve Bank with their printing presses bailed you out. The fuel of currency devaluation propels the market higher. In this environment, bad news for the economy is good news for stocks.

The Central Banks are communist-style Central Planners in the middle of the world economy that turns everything in the economic textbooks on its head. This is not an environment for investors, because investors are conservative and risk-averse. The international market has become the playground for speculators, where they are simply front-running the Fed.

If you can successfully analyse the Fed, you do not need to analyse listed companies because cheap liquidity will keep even dead dogs afloat. Nobody cares about valuations and dividend yields any more. Participants are frantically chasing capital appreciation. The zero-bound risk-free rate is the rocket fuel that propels the current value of future cash flows, to launch the shares price into the stratosphere. By reflating the credit bubble, the Reserve Banks are sowing the seeds for the next crash that will be larger than anything we have seen.

This is a game of musical chairs, and we will see who has a seat when the music stops

Spot on. SnP 500 average PE ratio is around 15-16. It is currently at over 37

Agree with you, Sensei. Huge asset bubbles are being created thanks to the Fed. What happened in March was just a precursor of what will come, a bear market like we’ve never seen before. I’m happy with my discretionary money in cash, waiting patiently for the next crash!

You’ve nailed it, as usual.

Your comment is a brilliant summary of the next decade or two, and the potential for the Fed to print itself into hyperinflation…a repeat of the Weimar Republic in 1922, anyone ?

Both gold and Bitcoin are becoming more and more attractive long term investments / hedges.

PS Don’t write off bitcoin without learning about it first – google Preston Pysh’s interview with Robert Breedlove – it will be worth the time and effort.

“Vanguard Group, which oversees more than $6 trillion in assets, found that less than 0.5% of its retail clients and self-directed investors in its retirement plans panicked and moved to all cash between Feb.19, the market’s pre-coronavirus peak, and May 31.”

Vanguard seems to be a great company but if 0.5% is representative then how did the market drop by 60% from 0.5% of investors selling equities? There must have been a partial selloff by many more investors.

And there you have it in one – their retail customers stayed. The commercial guys saw what was coming, got out & let the suckers take it on the chin…

And even more ballsy were the hardcore few (if any) who actually bought when markets where hitting the floor! Are there any among us who can claim to be of this fearless stature??

Guilty, when I was young and stupid, now that I am old and wise I still do……..

As they say those who tell you they bought low and sold high are lying.

End of comments.





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