“Let’s hold off on putting any money into the markets for a bit and wait until things settle down.”
I’m hearing these words from a lot of investors these days. Especially from people who have recently sold a business or property, had a bond or GIC come due, made an RRSP contribution, or anything else that generates a big chunk of cash which should be invested at some point.
I understand the urge to keep that hard-earned money in a nice, safe place. Given the roller coaster ride the markets have been on lately, the world looks pretty scary right now. You can’t lose what you don’t invest, right? So why not press pause, take a bit of a breather, and wait until the uncertainty clears up?
The problem is, while it might feel like the safest approach, there are actually a number of potentially very dangerous errors that come with this line of thinking. Starting with the notion you can’t lose anything if you just stay on the sidelines, and keep your money safely tucked away under your mattress.
First, there are our old friends, taxes and inflation, to think of. Forget about whether or not inflation is going to keep going up over the next little while. Given how little even the highest High Interest Savings Accounts and GICs are paying right now, thanks to taxes and inflation, any money you put into anything that’s completely safe will almost certainly be worth less a year from now than it is today.
Next, there are the odds to consider. If you’re like the vast majority of investors, you’ll almost certainly lose if you try to time markets. Sure, you might get lucky once in a while, and time something just right. But historically, the markets go up 75 per cent of the time and down only about 25 per cent of the time. That’s a pretty big difference. Put simply, it means that if you make a habit of trying to time your investments, there’s a three-to-one chance that the odds are going to be seriously stacked against you.
But perhaps the most glaring error in this line of thinking is that you could be ignoring one of the best sale opportunities of your financial life. Just like investors, markets don’t like uncertainty. So when things start to get jittery, the markets generally go down. And uncertainty is the one thing that’s definitely not in short supply right now.
The past six months, for example, have seen the worst performance among bond markets of the last 40 years. In equities, the S&P 500 has officially entered bear market territory, and the tech stocks that were financial heroes as recently as last year have been getting hammered. All of which means that all those investments you were planning to buy “one day” are on sale right now, for as much as 20 per cent off or better.
Of course, that doesn’t mean there aren’t any short-term risks. If you buy a stock today, can the markets go down further tomorrow? Absolutely. But for the long-term investor, these fluctuations are all just storm clouds that will one day pass. And when they do, your chance to buy some great companies at a substantial discount, or get impressively high yields on some quality bonds, will disappear with them.
In almost every other big-ticket thing we buy, we’re happy to wait until something is on sale before we put down our cash. But when it comes to investing, we tend to put our money away as soon as the big sales show up, and wait until prices go back up again before we pull the trigger. It seems we must all really like being part of a crowd, and unlike sales on cars or appliances, with investments, the crowds always seem to show up only after the sales are already long over.
This isn’t all just theoretical, either. In my 30-year career, I’ve seen this narrative play out time and time again. The financial crashes of 1987 and the early 1990s. The bursting tech bubble of 2000. The market meltdown of 2008. The COVID crash of 2020. For investors, these were all times of great uncertainty. But looking back with the benefit of hindsight, in every instance, the time to grit your teeth and invest was precisely when things looked the least promising and everyone else was headed for the door.
This time will be no different. It might happen sooner, or it might take a little longer. But today’s uncertainties will be forgotten. Quality companies and issuers will adapt and move forward. And the investors who will reap the most rewards will be those who bought quality investments when they had the funds and opportunity to do so – not those who waited until it felt more “safe.”
Today, a quality portfolio of blue-chip stocks will get you a dividend yield of close to four per cent. Many preferred shares have yields well over 5.5 per cent. And the most highly sought-after names in growth areas like cloud computing, social media, microchips and e-commerce are all 25 per cent to 75 per cent cheaper than they were just a few months ago.
Is this the best possible time to buy stocks and bonds? We can’t possibly know. But is it the right time to buy stocks and bonds? If we’re willing to learn anything from history, then the answer can only be a resounding yes.
This article is supplied by Alan MacDonald, an investment advisor with RBC Dominion Securities Inc. Member–Canadian Investor Protection Fund.