Investments

Plug Your Nose and Jump

“In the run-up to last year’s Presidential election, pundits, economists, and Wall Street analysts agreed on one thing: a Donald Trump Presidency would be a disaster for the stock market. The common wisdom is that markets hate uncertainty. They’re all about prediction, and Trump is unpredictability personified. Citigroup said that a Trump win would send the S. & P. 500 down three to five per cent, and, on Election Day, the hedge fund Bridgewater Associates told its clients that the Dow could fall almost two thousand points—a full ten per cent—if Trump was elected. As the result became clear, these forecasts briefly looked accurate: stock-market futures took a vertiginous overnight tumble. But the day after Trump’s victory markets rebounded, and, as he never tires of boasting, they’ve risen since.” – Trump’s Mysterious Stock Boom, James Surowiecki, New Yorker, March 6, 2017

Uncertainty causes volatility. Volatility kills confidence and a human’s natural response in the face of uncertainty is “fight or flight”. As emotional beings, investors’ skittishness typically leads to irrational decisions. Buying during euphoric times and selling in times of panic are common mistakes (see our blog “Sell Everything”…at Your Peril).

Today, like any day, is just another time of uncertainty. The markets are high and there is no end to the list of “what could go wrong”. Pulling the trigger and investing after the run-up is difficult. But will it end in disaster?

What happens if you invest just before market dips? To answer this, we use our Nexus North American Balanced Fund as an example. In the chart below, we’ve picked out the most dominant highs since the Fund’s inception in 1997 and calculated the subsequent annualized return to August 31, 2017. Had an “unlucky” investor invested their money on one of those euphoric days, how did they do?

The chart illustrates that those who were unfortunate enough to invest at a market high have fared just fine. Their returns may not be as high as they would have been had they invested at a market low. But, to quote Adam Sandler, these numbers are “not too shabby”!

Anyone investing new money in the market naturally worries that it’s a “bad time” and that the market will go down. The reality is that we can’t anticipate what will happen in the near term. But we do know that markets go up over longer periods. In fact, not trying to time the market is one of the keys to success. If your feet are still cold, consider phasing in over time to reduce market entry risk. Otherwise, get yourself a nose plug and jump in. The risk of being out of the market and missing post-correction rallies will do more harm to your long-term performance than patiently waiting out the downturns. AOJ


1 Chart represents the growth of $100 invested in the Nexus North American Balanced Fund from its inception date of August 31, 1997 until August 31, 2017. Returns presented prior to the deduction of investment management fees. Past performance is not indicative of future results.
Image used with permission: iStock/solevnikola