Waiting With Cash is Not an Investment Strategy
14 October 2020
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
— Peter Lynch
Coronavirus resurgence in many countries around the world. Vaccine trials delayed. Resumption of US-China tensions. Rise in jobless numbers. US presidential elections. Collapse of the oil and gas sector. There is no shortage of reasons for why you should hold off putting your money into the market. 2020 was a year of many firsts, but every other year has had its fair share of problems.
You could lament that it is very difficult to get a return these days. After all, we are living in a world of low bond yields and high equity valuations. However, investors may have forgotten that we have experienced extremely low bond yields in the past – the prior bond market peak was in the 1940s, which led to a 30 year bond bear market. We have also experienced long periods of high equity valuations in the past, so nothing is new. (see chart below).
The world has gone through many variations of the same theme before. However, choosing to bury your cash (or gold) in the ground whilst waiting for the uncertainty to pass is not a viable investment strategy. Neither is complaining about the lack of further help from the government or wishing you had put in money when markets had started to collapse in March. You need a actionable investment plan with clear goals.
In Vanguard’s study comparing investing immediately versus phasing it in over a period of time (in essence holding on to cash longer) showed that returns are almost always higher in the long-term, independent of whether an investor was risk-loving or risk-averse. The comparison of Sharpe ratios – which are returns adjusted for risk – also shows that immediate investing is the better solution.
In the latest edition of Burton Malkiel’s famous book, “A Random Walk Down Wall Street“, the author has updated figures on what an investor would have reaped if he or she had started investing in 1969 and held till 2018.
He wrote, “An investor with $10,000 at the start of 1969 who invested in a Standard & Poor’s 500-Stock Index Fund would have had a portfolio worth $1,092,489 by April 2018, assuming that all dividends were reinvested. A second investor who instead purchased shares in the average actively managed fund would have seen his investment grow to $817,741.”
Whilst he was trying to make a point that index investing would have beaten an active fund manager substantially over the long run, the other important point to note is that putting your money to work in the market – active or otherwise – would have provided a return of over 9% p.a. Now, compare this to sitting in cash, perhaps reaping the returns of a bank deposit rate of 2%. You would have made 30x less!
Remember that markets have gone through numerous cycles and many different bull and bear markets (see chart below). We have gone through oil crises, world wars, economic troughs, financial crises, bankruptcies. There will always be some worry or another. If you wait for the coast to be clear you would be missing out a lot. Yes, returns are volatile but the good always outshines the bad. When viewing both bull and bear markets side by side, it is clear that investing in markets has rewarded investors. It also shows that bad periods are only temporary.
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