With the recent turbulence in the stock market, I have had a number of readers question whether this is the market top. My attitude is so what. Sure losing money by investing at the top of the market is a horrible feeling. But over the long term, staying invested, even at market highs, has produced wonderful returns for investors.
Let’s see how investing at a market peak has turned out in reality.
John, the world’s worst market timer, started his career in 1970 at the age of 21. He saved £2,000 a year for 3 years before making his first purchase in a plain vanilla S&P 500 index fund in December 1972.
As it turned out, buying in December 1972 didn’t seem a good move at the time. This is because there was a brutal bear market in 1973-74 causing stocks to decline by 50%. This experience scarred John a little as he decided to wait and not invest any more money at present. But crucially, he didn’t sell any of his investments and decided to ride it out.
After this experience, John became more cautious with his money. John only felt comfortable again to invest in the stock market in August 1987 – a full 15 years after his last purchase. He invested he invested £46,000 (his additional savings since 1972) in the market.
But lo and behold, there was a market crash in October 1987 and stocks crashed 30%.
Once again John didn’t sell any of his stocks. But this experience once again humbled him and he did not put anymore money in the market for a while. He focused purely on saving money again.
By the late 1990s, the internet revolution was underway and John was convinced that it was now safe to try his luck in the markets once again. So, John took the £68,000 he had saved over the last decade and made his 3rd stock purchase in December 1999.
Once again, John’s timing was horrendous. After his purchase, the market subsequently declined 50% as the dot com bubble burst.
And again, John didn’t sell any stock but instead remained cautious and decided not to invest for a while. Instead he concentrated on saving money. He saved aggressively and had £68,000 by October 2017. He once again grew confident and invested all the money at this time.
However, Joh’s timing was off once again and his portfolio got chopped in half by the financial crises of 2008-2009. And like before, he decided not to sell and simply hold on to the stocks he had.
But this time John had enough. He decided not to invest another penny in the stock market.
It is now 2018 and John has decided to retire one year short of his 70th birthday. He hasn’t checked his retirement account in a while but he’s preparing for the worse. Over his life, he invested £184,000 in an S&P 500 index fund. But on each of the 4 occasions he invested, the market seemed to crash right away. John appears to be the worst market timer in the world.
Yet when he opens his retirement account to see the value, he is astounded. His final portfolio value is close to $800,000!
If you are shocked at this figure, you need to go back and study the power of compounding. Even though John earnt a paltry 5.5% annual rate of return due to only investing at the worst possible times, his portfolio value has ballooned due to never selling a single stock and letting his money compound over time.
I urge you to bookmark this post and have a read of it any time you think about selling a stock or have the fear that you are investing at a market peak. If you have a long enough time horizon 7 years +, you should not worry too much on what the market is doing. Instead, focus on saving hard, investing that money and not panicking and selling when the world seems to fall apart. If John can build a stellar retirement pot despite having the worst luck in the world, imagine what you can do with mediocre luck.