The Long Term Investor

WELL......since it is the weekend...here is a little article that reflects many of the simple concepts that I try to follow in my investing. These are PROVEN concepts.....but....many of them are very difficult for investors to actually follow....due to the human brain.

Should I Invest When The Market Is High? Dispelling The Buy Low, Sell High Myth

https://www.forbes.com/sites/kristi...g-the-buy-low-sell-high-myth/?sh=6c573ee95376

(BOLD is my opinion OR what I consider important content)

"Most investors realize trying to time the market by always buying low and selling high isn't a realistic endeavor. Yet even with that knowledge, if you have a substantial amount of cash to invest, the thought of investing when the stock market is hovering near all-time highs may give you pause. Similarly, when facing the opportunity to 'buy the dip' (remember March 2020?), few investors have the stomach to do so.

As reasonable as these examples may sound, they both describe aspects of market timing. Despite the recent pullback in the U.S. stock market, the S&P 500 has already set 10 new record highs in 2021 and coming off two very strong years. So what should you do if you have cash to invest and the market is strong?

Should I invest when the market is high?
Sitting in cash just because the S&P 500 is setting new highs is a mistake on several levels. First, when investing, it's critical to make decisions based on long-term expectations, not short-term market moves. Second, past performance is not indicative of future results. Setting new highs doesn't necessarily mean the market has peaked and a correction is imminent, just as a pause during a sharp selloff doesn't mean there's not still further to fall.

Further, historical data does not support the idea that investing cash when the market is high is likely to produce lower future returns. In fact, according to J.P. Morgan, investing on days where the S&P 500 closed at a new all-time high can actually produce better returns than investing on a day where the market didn't set a new record.

Investing at new highs...

Is it worth investing at all-time highs?

J.P. Morgan


...versus buying the dip
Investors might be surprised to learn that the 5-year cumulative returns after declines in the stock market (buying the dip) are lower than the cumulative 5-year return after the market sets new highs.


Investing after a decline in the stock market.

Dimensional Fund Advisors
Source: Dimensional Fund Advisors²

This isn't an apples-to-apples comparison as the Fama/French Total US Stock Market Index is an expanded representation of the entire US equity market and the chart below is over a much longer time period. However, since the S&P 500 generally represents 80%-85% of the whole US stock market, it's still a helpful basis for comparison.

Market timing doesn't work because there's no telling what markets will do
Covid-19 selloff and subsequent rebound

In 2019, the S&P 500 was up nearly 31.5% on a total return basis. That's over three times the average annualized return for the index since 1926. Nowhere to go but down in 2020, right? Wrong. Despite the Covid-19 pandemic, the S&P 500 was off to a strong start in early 2020. After peaking on February 19th, stocks began to fall sharply and would eventually bottom on March 23rd, down about -30% on the year including dividends. Yet by the end of 2020, the S&P 500 had set 33 new record highs, finishing the year with an 18.4% total return.

Over the course of two years, the index returned over 55% cumulatively. If you bought stocks at the February 19th peak, it would take you until August 10th to break even (the S&P 500 hit a new all-time high on August 18th) and you'd be up nearly 13% by the end of the year.

The 2008 financial crisis

The markets don't typically recover as quickly as they did in 2020. The S&P 500 peaked October 11th, 2007 before the Great Financial Crisis. If you invested in the index at the high, it would take nearly four and a half years to recoup your losses and another year before the S&P 500 would hit another new high in April 2013. Your cumulative return during this five-and-a-half-year span would be 14%.

Investing is about time in the market, not timing the market
Unless you have a crystal ball, there's no way to predict how the market may move in the short term. But historical data can provide helpful context to set a range of likely outcomes for the future. It's called mean reversion.

Using this long-term lens, there are 3 important factors to keep in mind when investing in the financial markets.

1. History shows as the number of years you stay invested increases, the risk of losing money decreases.
This is why we call it long-term investing. As the examples above illustrate, over time, the stock market has trended upward over the last 95 years. However, over the span of several months to years, anything can happen. Regardless of whether you invest when the market is high or low, you shouldn't pay too much attention to your returns in the short-term.


As the number of years you stay invested increases, the risk of losing money decreases.

BlackRock
Sources: BlackRock; Morningstar. US Stocks represented by S&P 500 and the IA SBBI US Large Cap Index. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. It is not possible to invest directly in an index.

2. In the last 20 years, 70% of the best days in the market happened within 14 days of the worst ones.
You can't get one without the other. But if you try to time it, it can cost you dearly. So if you're afraid to invest because the market is up or down, consider the cost of missing the best days. Deciding whether or not it's a good time to invest shouldn't have much to do with recent market conditions.


The best days in the stock market often occur right after the worst days.

J.P. Morgan
Source: J.P. Morgan. Returns are based on the S&P 500 Total Return Index. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. It is not possible to invest directly in an index.

3. What's the alternative? Bonds and cash aren't investments for growth.
If you're concerned about stock valuations and are hesitant to invest, what options do you have to put cash to work? Interest rates have been falling for decades, which has hurt bond returns. Rates on savings accounts are minimal, so staying in cash often means missing out. And keep in mind - many stocks pay dividends. The income can help offset losses when stock prices fall.

Also consider if the market doesn't fall as fast or sharp as you're predicting. How much time will you let pass before investing? The risk is that you've missed out on growth and end up investing cash when valuations are even higher.


Interest rates have been falling for decades, which has hurt bond returns.

BlackRock
Source: BlackRock

Ways to reduce the risk of investing at the 'wrong' time
Dollar-cost averaging
Whether investing during a recession or high-flying stock market, dollar-cost averaging can be an effective way to reduce the risk—and fear—of investing at the wrong time. Unlike trying to time the market, with dollar-cost averaging, you invest at predetermined intervals, regardless of whether the market is high (or low) on that particular day.

In personal finance, it's not always about what makes sense on paper. Managing the emotional response (e.g. sleeping at night) is a valid concern, though not without limit. Dollar-cost averaging can be an effective strategy in volatile markets or when you have a large amount of cash to invest. Just make sure you set your investment plan in advance and stick to it.

Think outside the S&P 500
Diversify, diversify, diversify! The above examples focus on the S&P 500 because it's familiar for investors. But that doesn't mean it's all you should consider investing in. Diversification is the cornerstone of any risk-adjusted strategy to build and protect your assets. This includes thinking outside of the S&P 500. Here's why.

Asset classes act differently over time and in various market conditions. The risk-reward framework will also vary, as will current valuations. For example, J.P. Morgan reports that the forward price-to-earnings ratio on March 1, 2021 for the S&P 500 was 42% higher than its 20-year average, versus the All Country World Index (ex-US) at 24% higher. Put another way, most equities are expensive on a historical basis right now, but international stocks are less so.

Investing across asset classes (such as stocks and bonds) and within them (such as mid and large cap equity) is key to reducing volatility and asset correlation in your portfolio. It also helps investors reduce the risk of investing a lump sum in the market at once, as asset classes will generally be performing differently at the time of investment.

There are many other factors to consider when choosing what to invest in, but the point is that the S&P 500 isn't the only option. To illustrate how asset classes perform over time and the relative volatility, consider the graph below which shows total returns from 2005 - 2020.

The chart plots the U.S. stock market (S&P 500), U.S. bonds (Bloomberg Barclays Aggregate U.S. bond index), and global equities (MSCI ACWI ex-U.S.) and emerging market equities (MSCI Emerging Markets).


Returns and volatility of different asset classes over time.

Darrow Wealth Management; YCharts


Focus on what you can control
You can't control the stock market. But you can control how you invest in it and what you do during downturns. A high savings rate, staying invested, and sticking with the plan are critical parts of building and protecting wealth over the long term. Trying to time the market by waiting in cash hoping for a downturn is like leaving your financial future up to chance."

MY COMMENT

Some good general material above and some nice illustrations. Many of the charts and graphs above illustrate data that your BRAIN would tell you can not be true.....yet it is. A starting point for anyone trying to decide how and when to invest. The PRIMARY factor is what will allow EACH investor to be comfortable and stay invested for the long term.

 

WAY TO GO......andyvds going over your account with your daughter. One of the best things you can do for your kids is give them education in money, finances, investing, etc, etc. It GREATLY increases their chances of success in life. It ALSO greatly increases the chances that they will pass the same information and habits of successful people on to your Grandchildren.

 

So.....this being the weekend....I am going to discuss some investing alternatives.....collectables/hard assets. ROLEX WATCHES. I am not a watch person....... but...... I do find the financial aspects of this stuff interesting.

I have been reading some of the watch forums online lately. The world of ROLEX is very fascinating from a financial/investing standpoint. I have an old Rolex that belonged to my dad. It is a 1954 Rolex. He was company commander in Korea and when his time was up his men bought the watch for him in the PX as a gift. It is NOT particularly valuable.....perhaps $1,000 to $1,500...... since it is not a desirable time period piece. BUT....many of the Rolex models from the 1960's and 1970's up to now sell for and are worth BIG BUCKS.

I have learned some fascinating info from the various watch forums. The primary forums seem to be....."watchuseek"...and...."rolexforums".

First I have come to realize that for most of the desirable models......Submariner, Daytona, GMT II, etc, etc, or any "average" NEW Rolex for that matter.....you are going to pay about $9,000 to $15,000 for a watch. Ok, who wants to blow that much money for a watch? That is a lot of money. BUT....as I read further I realized......that there is much more to how the finances work.

First thing......lets take a $9,000 watch as an example. You will pay that amount to buy the watch as list price from a authorized dealer. So you are out $9,000. BUT....Rolex watches have an after dealer value. Like buying a house the watches have value as a resale item. So lets say you buy a Submariner at $9,000......that watch WILL always have a value on the resale market. So......a watch that you buy retail for $9,000 will perhaps have a value to sell to a dealer in used watches of $7,500. So.......you are spending $9,000.....but..... you have an asset that is worth $7,500. In other words.....if you net out that transaction.....you are not in the hole by $9,000....you are in the hole by $1,500....on paper.

There is a strong system of dealers that buy used Rolex models from owners that operates somewhat like a stock market. Some even publish their "sell" and "buy" numbers daily for the different models.

What makes the system even more fascinating to me reading about it....is the system of GREY MARKET DEALERS. I remember when buying something on the grey market used to mean that you were buying at a discount to the dealer price. WELL....not with these watches. The stainless steel models like the Submariner, Daytona, Gmt II, and others are produced in limited supply by Rolex and are sold NEW....ONLY...through their network of authorized dealers. So it is VERY difficult to find an AUTHORIZED DEALER that will have one in stock.......or.....will sell YOU one. The authorized dealers are REQUIRED to sell at list price.....they can not go over that price. Each dealer receives an annual allocation of watches that they will get over the year. Most dealers will get two shipments per month...presently.....of stock from Rolex. They will have customers lined up to buy those watches IMMEDIATELY. So they might get 15 watches of various models on January 15....and they will all be sold within a day to customers on the list that want those watches.

So now there is limited NEW stock and limited authorized dealers and limited ability get a dealer to sell you a watch. SO......the GREY MARKET prices tend to be $5,000......$10,000......$15,000.....even $20,000 ABOVE the actual list price of the watch that you would pay at an authorized dealer.

SO now the impact of this UPSIDE DOWN market is........if you can find a dealer that will sell you a particular watch......as soon as you walk out the door you can sell......FLIP...... that watch for.....lets say.....$10,000 more than you paid for it.

As a result there are wait lists at all the authorized dealers.....and customers trying to get in with a dealer to get a watch at list price. There is also a VERY active market of FLIPPERS....that get lucky and happen to get a watch at a dealer than turn around and flip the watch to another buyer or to a grey market dealer.

On the watch forums......there are many posts about how to develop a relationship with an authorized dealer to be able to get on their wait list or to get a watch at list price. So now on top of the financial issues....it is s whole world and system of "relationships" with a dealer to try to get a watch at LIST PRICE that will immediately be worth double that price when you walk out the door. Many of the more desirable models with list prices of $9,000 to $15,000....BUT...after market prices of double that.....have dealer wait lists of 2-3-4-10 years.....if you can even get on the list.

Looking at the USED prices.....this is ALSO a fascinating market. Like buying a house....over time the used models that are mainstream....go up in value. So eventually you have someone that...lets say purchased a Submariner in 1968 for $280.....now if it is in original but used condition...that watch may have a market value of $25,000 to $50,000.

A VERY fascinating world out there in assets and collectables like these watches. I am NOT a watch person or collector....but in EVERY category of collectable or hard asset it seems that the NUMBER ONE RULE is to buy PROVEN QUALITY for which there is an ACTUAL resale market and proven values. If you are interested in comics, baseball cards, antiques, art, watches.....anything....and you know what you are doing and research the field....you can do very well financially and at the same time get to enjoy whatever it is for your lifetime or until it is time to sell it and move on.

BUT....in all this stuff.....obviously....you need to do your research, know the market, avoid FADS and HYPE and stick with long time proven value.