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Tuesday, 29 August 2017

The sky isn't falling, and you should be investing

I generally avoid mainstream media. I realised very young that most news shows are interested in showing you all the horrible things happening in the world. They devote 90% of an hour news block to tell you about all the bad things that will never affect you (Do we really care that a flock of chickens escaped and are running amok in a caravan park?) and the other 10% to sports.

Unfortunately this obsession with the worst news has burrowed into the minds of most people, and turned us all into hopeless pessimists. Investors are convinced the next market crash is right around the corner, and sitting on their piles of gold, waiting for the best time to invest.

That time is now.

This post isn't going to be a pearl of economic wisdom proving that the economy is going to continue on it's amazing upwards trajectory without a blip. In my lifetime there have been two great market crashes (the dot com bubble and the GFC) and pessimists are convinced that Australian housing is overpriced and the bubble will burst any day and drag the share market down with it. I've been hearing that for ten years, so I don't trust those experts.

Market returns over the years

That's not to say it won't happen, but I'm not stressing out about it. Markets will yo-yo up and down, but in the long term they'll keep travelling upwards.

Take for example, this chart from Vanguard.


This chart show what would happen if my parents invested $10,000 in Australian Shares from the day I was born until now. Despite two major crashes it returns over 10% per annum, and is now worth $123,000. Over such a big timeline, the dot com bubble is barely visible.

If my parents had been a little more conservative and waited until just before my 15th birthday, they would have invested right before the Global Financial Crisis. Let's say they invested in April 2007. Ten years later, the chart looks more like this.

This chart is much flatter, but it is still worth 4% per annum. While not as amazing as the last one, this chart shows what would happen if my parents had bought in at the worst possible time in my life. A year after buying in, they would have been down 16%, or over $3,000. However, as long as they didn't panic and sell, just a few years later they would have made that money back, and be $4,000 ahead.

Of course, they could have been really super smart, and bought in at the bottom of the market. That's the dream, because then their returns would look more like this:
From February 2009 to now, the share market has returned 10.9% per annum. A $10,000 investment becomes $24,000 in just a few short years without you adding a cent to it. Investors often quote 7% as a historical average, so anyone who could get 10% would be absolutely thrilled.

Invest at the bottom of the market... right?

So, Hands up everyone who wants a 10% return on their investments? Yepp, me too. Keep your hand up if you're willing to sacrifice $85,000 to get the right market timing. Not me.

Once again, hypothetically, let's say my parents had $20,000 to invest in me when I was born (if only!). To hedge their bets, they put $10,000 in a Vanguard Australian Shares Fund, and they hold $10,000 in cash, waiting for the best time. But watching the market crash in 2009 they were too scared to deploy that $10,000 in cash.

The $10,000 in cash is now $30,000 because it's been sitting a high interest bank account. The shares had grown to $95,000, but when the market crashed they dropped to $50,000 in a few short months. So my parents decided it was too risky to put the money into the markets, and they left it in cash.

Today, at the ripe old age of 26, my returns would look something like this:
That rapidly growing blue line is now $123,000 of Vanguard shares, paying dividends every year. That purple line, crawling upwards at a snails pace, is the cash that was held aside for when it was the 'right time'. It's only worth $39,000.

So when is the best time to invest?

The best time to invest is yesterday. Or last year. Or even last decade if you could. However I assume that none of you have a time machine handy, so the best time to invest is today, and everyday moving forward regardless of the doom and gloom you keep hearing.

Over almost any ten year period* you will make more money from investing than from stuffing your mattress and waiting for the apocalypse to come. The market might crash tomorrow, it might crash next week, it might crash the day before you retire early with your million dollar nest egg.

Most highly paid hedge fund managers can't consistently beat the market. Even if they could, they can't stop a crash from happening. If (like me) you're many years out from retirement, the best place for your money is in the markets, earning a return.

And if the market does crash tomorrow, I'll be the first one at the sale buying up even more shares to fund my future.


* While I was playing with the Vanguard Index Charts I managed to find a couple of scenarios where cash was a better bet over ten years. Over 15 years, cash never won, even when you set the 'end date' at the very bottom of the GFC.



11 comments:

  1. I'm with you! I am 27, so my investing history has been in a bull market thus far. What am I doing? I just keep plugging away at my index investing :) Here's to the long haul!

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    Replies
    1. I think my only 'crash' has been watching the markets panic as Trump got voted in :p

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  2. Dear Lady,

    Like you, I'm not waiting to buy on a low and am heavily invested in stocks (no bonds, 6 months emergency fund). I've read many posts talking about being fully invested and then ending with "and when the dip comes, I'm going to buy up even more".

    Question, if every one is fully invested, where will the extra money come from when the market dips? I'm trying to figure out how much to hold back for when the opportunity comes.

    Besos Sarah.

    ReplyDelete
    Replies
    1. Hi Sarah, I'm currently Dollar Value Averaging my way to this years investing goal - as the markets go up I put in a little less, as they go down I put in a little more. I hold a buffer in both an emergency fund and a 'invest this if the times right' fund.

      The money I hold back is in an offset account against my mortgage, and it's never more than $5k. If it creeps over that amount, I invest it somewhere.

      Others have different strategies, but with 8years left to my goal, I'm comfortable riding out any crashes.

      Delete
    2. Dear Lady,

      Thanks for clarifying and providing a value to your "invest if this is right" fund.

      Besos Sarah.

      Delete
  3. I am holding cash that I plan to drop into the sharemarket when that crash comes. I think my personal investment plan will always have more cash holdings than others might recommend purely because I like to have a backup plan - to do anything and to be able to react instantly. Having to liquidate other investments is fine but it all takes time.

    ReplyDelete
    Replies
    1. Between my emergency fund and my overpaid mortgage (also know as my 'invest this if the times right' fund I have almost $20k / six months expenses. I'm definitely not overcommitted, some days I feel UNDER committed :)

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  4. Ah, I should also say that doesn't mean I'm not investing in shares - I am, and I will continue to do so. Just not 100% of my everything will go in because of that insurance policy that I like to have in my back pocket.

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    Replies
    1. I guess I'm similar. I have automated set amounts that I invest regularly, but I save more than that so my buffer is always building up. I invest it when it gets too big.

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  5. I'm about 50/50 shades and cash at the moment. That is because I have quite a large 'emergency fund's that will one day be used as a 12 month buffer for parental leave.
    Everything from here on in will be going into shares, no matter the state of the market. I'm in for the long term so dollar cost averaging seems a good bet.

    ReplyDelete
    Replies
    1. I always forget about parents! I have a six month emergency fund, but I also don't have any kids to feed. Just a noisy pushy cat :D

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