Is This the Right Time to Invest?

In a recent article by Charles Rotblut, CFA, editor of the AAII Journal, he reminded his readers of some basic investing truths. He started by stating that investing is a long-term process and over time markets rise. He summarizes this as follows:

In a nutshell, research of return periods shows that the average market downturn takes less than eight months to recover — top to trough to top again.
Since 1871, market downturns have recovered as follows:

• 33% of market downturns recover within a month
• 50% of market downturns recover within 2 months
• 80% of market downturns recover within 1 year
• 95% of the time, those big “once or twice in a lifetime drops” return back to even in 3 to 4 years
• Collectively, since 1871 the time it takes for the market to recover (top to trough to top again) is a mere 7.9 months

Unfortunately, most individual investors watch daily, weekly, monthly and quarterly market moves like their life depends on it.

Let’s compare two real-life investors with the same portfolio allocation in the “once in a lifetime market drop of 2008”. Investor A pulled out of the market on February 19, 2009 (near its bottom) going all to Bonds and re-entering on May 18, 2009 in the same allocation. Investor B held steady. Investor B was made whole in two and a half years, from April 2008 to the same level in October of 2010. Investor A took three years to recover (April 2008 – April 2011) -six months longer- just by sitting out of the market for three months.

Since no one knows what the future holds - and cannot predict which way the market will turn, let alone which sectors will out-perform - it is wise to diversify and stay the course. Unfortunately, some investors panic when the market is near the bottom and jump back in at a market top (after they are thoroughly convinced that the market is going up). To repeat the wisdom of Charles Rotblut, investing is a long-term process. Otherwise you are just speculating.

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