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Why Invest Now? A Tale of Three Investors

Published on March 13, 2019
“Now’s not a good time to invest,” or “I’m waiting for the right conditions” are familiar refrains we hear from investors and advisors alike. Fortunately for long-term investors who don’t take regular withdrawals from their portfolios, the sequence of returns doesn’t affect the ultimate investment outcome.

magine three investors who each start out with $10,000 invested in the S&P 500 on January 1, 1979 and must stay fully invested until December 31, 2018.

S&P 500 INDEX ACTUAL MONTHLY RETURNS UNDER VARIOUS SEQUENCES (JAN 1, 1979 – DEC 31, 2018)

Source: S&P Dow Jones Indices LLC

Our first story begins when Lucky Lucy invests $10,000 in the stock market and has nothing but positive monthly returns for an astonishing 26 straight years, in the process becoming a millionaire in 5 ½ years and gaining worldwide notoriety for her impeccable market timing. Her massive wealth and fame peak at $283 Million, but then she can only watch it all fade away as tragedy crushes her wealth. Loser Larry, as should be expected, invests his $10,000 the day before Black Monday and then proceeds to be beset by the worst financial catastrophes in recent history. His doomed investment dwindles down to 12 cents, his car explodes, his house burns down, and his dog runs away. After years of agony, he finds a four-leaf clover and his wealth accelerates upward with all the gains coming in those last heady years. Finally, there is Reality Randy, who invested in the real world, where all the things that happen in the real world happen when they should, and his wealth grew steadily over time with occasional pullbacks and surges.

The real world doesn’t seem so bad when compared to the extreme stories told above. But regardless of the story, the main point is that the sequencing of investment returns does not matter for long-term investing. All three of our fictitious investors ended up in exactly the same place financially. We have no control over the timing of world events or how the market will react to them. The real driver of long-term wealth is the amount of time spent in the market and the power of compounding. So, stop fretting about current market conditions and stay focused on the destination, not the journey, when it comes to your long-term growth portfolio.

From the Behavioral Viewpoint


What is Going On?

  1. As a result of our herding instincts we are looking for social validation and are conditioned to follow the herd, resulting in a constant angst. Are we doing the right thing? What is everyone else doing?

  2. We have a hard time thinking long-term and are hardwired with recency and availability bias, where we give short-term events and the current environment more relevance and weight than they deserve.

  3. We have loss aversion and are fearful about even the possibility of losing money and want assurance that our investments won’t go down in value to avoid regret. The fear of initial loss literally outweighs any potential long-term benefits in our minds.

  4. Fallacy of control leads us to believe that somehow, we can anticipate and manage around market conditions, events and cycles.

What can we do?

  1. Develop a needs-based financial plan that separates short-term and long-term investments. Fund long-term investments early and withdraw funds as late as possible.

  2. Build a strategy-diverse growth portfolio that can be resilient in a variety of market conditions and stay fully invested over time.

  3. Work with an experienced financial advisor who can provide valuable perspective and coaching to help you stay on track.


Get Behavioral Investing Insights

Behavioral Viewpoints feature new topics each month which are intended to help advisors and investors gain a deeper understanding of how behavior shapes the investing landscape.

IMPORTANT INFORMATION AND DISCLOSURES

The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product.  There can be no assurance that future recommendations will achieve comparable results.  The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.  AthenaInvest disclaims any responsibility to update such views.  These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any AthenaInvest representative.

You are solely responsible for determining whether any investment, investment strategy, security, or related transaction is appropriate for you based on your personal investment objectives and financial circumstances.  You should consult with a qualified financial adviser, legal or tax professional regarding your specific situation.  Investments involve risk and unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

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