I have often been asked by clients over the years whether or not now is a good time to invest. My stock answer is that it is virtually impossible to time the market and that it is the time in the market, not the timing of the market, which is likely to produce the best investment returns. This strategy is perfectly illustrated by the graph below courtesy of the fund manager Fidelity. It is staggering to think that by not being invested in the market for a relatively small number of days what a huge impact it has on reducing investment returns.
Stay invested: Don’t risk missing the market’s best days
Past performance is not a guarantee of future results. The hypothetical example assumes an investment that tracks the returns of a S&P 500® Index and includes dividend reinvestment but does not reflect the impact of taxes, which would lower these figures. “Best days” were determined by ranking the one-day total returns for the S&P Index within this time period and ranking them from highest to lowest. There is volatility in the market and a sale at any point in time could result in a gain or loss. Your own investment experience will differ, including the possibility of losing money.
Source: Bloomberg, as of 3/31/2020.
It’s said that only fools and geniuses get the timing right of when to buy and sell investments. The truth is nobody can get the timing right regularly, not even fools and geniuses. The reason why, as put so eloquently by the great Warren Buffet is because “The market can remain irrational much longer than I can remain solvent.”
So even when you believe prices are very high, irrationally high, you could still be wrong selling because prices could remain high for years to come. You could argue that such irrationality is already happening. At the time of writing this blog cryptocurrencies and US technology shares are arguably in a price bubble. Many of them have reached sky-high valuations such as Dogecoin and Tesla. Cryptocurrencies have risen to implausibly high valuations with Dogecoin up 7,500% this year to date. Tesla’s share price is on a PE ratio of 637 which is about 40 times more expensive than an average US stock with a more reasonable PE ratio of 16. The US stock market is valued at more than double its fair value according to Warren Buffett’s own stock market valuation metric. However, most of the over-valuation of US stocks is in the technology sector, especially the Giant Tech shares of companies such as Google, Facebook, Amazon, Apple, Netflix and Microsoft which represent more than 25% of the total value of the US stock market as measured by the S&P 500 Index.
So whilst Fidelity’s study has merit about remaining invested and not withdrawing your money from the market, there is equally an argument that selling when assets appear to be in a bubble could be quite prudent by banking some profits. You may not get the exact timing right meaning you could be giving up further profits but deciding to bank a healthy profit is never a bad thing. Then when the market crash eventually happens you can buy back those same assets you sold at much lower prices i.e. at discounted rates. You know it makes sense.*
*The value of your investment can fall as well as rise and is not guaranteed. The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information contained in this article is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future.