Invest Now or Wait for a Crash?
Invest now or wait for a crash! That is the question many investors face. Whether you’ve recently sold a house, won the lottery, inherited money, had a pay off from work or have always kept money in cash. Whatever the reason, you’ve got a lump sum in cash and you don’t know whether to invest now or wait for a crash.
Well, some might be waiting for a crash, whilst others could be settling for a minor down turn. In reality it probably doesn’t matter. In either case you could be waiting a while because the stock market has a habit of going up a lot more than it goes down. Last I looked it goes up about two thirds of the time, leaving only a third for down time.
With that in mind, it could be easy to come to the conclusion that you should just invest now, otherwise you’ll miss out on all that upside. But what if you choose to invest right before the dreaded third that goes down!
After all, you’d have to be pretty young to not remember what happened in 2008 when the stock market lost around 40% of its value across the board.
That mega crash sliced through financial markets with no regard for geography or sector. Businesses went bankrupt, people lost their jobs and common phrases like “safe as houses” became obsolete.
That said, lots of people weren’t invested during the bull run that led up to that financial crisis. They were still nursing their wounds from the bursting of the Tech bubble in 2000! Two major crashes less than a decade apart!
Major crashes happen with a lot more regularity than people think. There have been many, but perhaps the most famous occurred in 1929.
The Dow Jones Industrial Average (the Dow) is a stock market index that represents 30 large publicly owned companies in the US. During the crash of 1929 and subsequent Great Depression it lost almost 90% of its value and took 25 years to recover. Historically, the Dow Jones has crashed by over 40% eight times.
But as with the UK and most other western stock markets it always seems to recover. Having said that, don’t mistake always have with always will.
At the time of writing the Chinese stock market is down 40% from what it was prior to crashing over a decade ago and the Japanese stock market is about 40% down from its highs before it crashed about 30 years ago. Crashes do happen and though unlikely there is always the possibility that they don’t recover.
It was only months ago markets dropped near 20% seemingly overnight and for no apparent reason. Waking up with your bank balance a fifth lighter than the day before probably isn’t most people’s idea of fun.
Experts have ideas about why it happened, but nobody was sure. Lots of people have explanations about why a crash happened. Even more have explanations about why a crash is going to happen.
Why a crash is just around the corner
Right now we in the midst of the longest bull market in history. The US and China are embroiled in a trade war. Europe is weighed down with Brexit, Italy and a struggling economy, and the middle east could be teetering on the brink of War.
Not to mention the fact that by a whole host of valuation metrics, stocks are expensive right now, particularly those of the US. There are good reasons to be fearful that a crash is just around the corner. In fact, some would say you’d be mad to invest right now!
And they might be right, but in all likelihood they are wrong. That’s because the situation we find ourselves in is not unique in the slightest. Throughout history there has always been a multitude of compelling reasons not to invest. And however compelling they were at the time, most of them turned out to be false.
In short, stocks have gone up a lot more than they’ve gone down. In fact, over the long term, historically, stocks went up period. The very fact that stocks go up more than they go down suggests you’d be better investing sooner rather than later.
Bad news
It can be difficult at times with all the negative news out there. In fact, some people think crashes are a self fulfilling prophecy. If there’s enough bad news and negativity out there, it’s bound to filter into the financial markets and influence people’s behavior.
But the very fact that bad news sells, means the news we read, and the gossip we hear is, on the negative side of the truth to say the least. No matter, the issue or the country, people incorrectly assume things were better in the past, are worse now, and will be even worse in the future.
But the thing is studies have shown that in nearly every case the opposite is true. People just don’t realize how good things are. Nobody wants to read the positive stuff, even though there is loads of it around.
Nothing I’ve encountered leads me to believe financial and business news bucks this trend. Hence, relying on it, to make investment decisions is questionable at best, and could be financially devastating at worse.
Even the best data for making financial decisions is unlikely to help you know when the next crash is coming. The reality is, nobody knows. And this includes the experts! They don’t know any better than we do what is around the corner.
Jack Bogle & Vanguard
I think Jack Bogle, founder of Vanguard and creator of the first index fund puts it best:
The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.
Jack Bogle – Common Sense on Mutual Funds.
The truth is the overwhelming evidence suggests waiting for a crash is likely to be a fools errand. Instead, you are better off sticking your money in as soon as you have it and then keeping it in the market through thick and thin.
Waiting for a specific time to invest or pulling money out with the notion that you’ll put it back in at a more suitable time can be severely detrimental to your investment returns.
Vanguard, the company Bogle founded and the largest provider of mutual funds in the world has carried out some good research in this area. They found investing all your money immediately in one lump sum beat drip feeding money into the market two thirds of the time.
They also found that it probably doesn’t pay to be out of the market at any time. The graph below shows a 30 year period from 1986 until 2016. The blue line is the return of the FTSE All-Share Index, which is an index of the UK stock market. The grey line also shows the FTSE All-Share Index, but doesn’t include the 10 best days.
FTSE All-Share Index 1986-2016
If you had missed those 10 best days you would have lost just about half your return!
So it’s clear if you want the best chance of achieving the highest returns you should just invest immediately. Those who wait for crashes have the odds firmly stacked against them. They could be missing the ten best days!
But, and it’s a big BUT, the fact remains that people hate losing money magnitudes greater than they enjoy making it. The fact also remains, that though unlikely the markets could crash tomorrow, and here lies the biggest challenge for an investor.
You’d have to be in possession of an iron stomach not to feel devastated if your wealth halved the day after you invested it. Knowing that markets usually recover and reach new highs probably wouldn’t stop the overwhelming sense of devastation that could send you to a psychological place you probably don’t want to go.
Many a sensible mind has been overcome by emotion in such a situation. And unfortunately emotions often lead to panic selling at just the wrong time when stocks are cheapest.
A sensible alternative
Which leads to the only sensible alternative there is, that of drip feeding your money into the market. The reality is the question of whether to invest now or wait for a crash answers itself. You should invest now. Waiting for a crash is a fools errand. The more appropriate question is whether to drip feed into your investments over time or just go all in.
The very bravest could go all in. Those with a modicum of fear could split a lump sum down the middle into a couple of quarterly payments and be done with it in half a year. The less confident may like to make monthly payments over a number of years. How long you drip for depends on your ability to manage your emotions when your bank balance starts going down.
The magic of drip feeding is that if the market does crash, you still have money to buy stocks at lower prices.
If you do take the drip feed approach it is essential to stick to the plan. Many investors like the idea of buying discounted stocks after a crash, but it’s easier said than done. Crashes tend to accompany news stories about the world ending causing even the most well laid plans to come undone through fear.
It’s not easy to buy stocks when stock prices are plummeting, houses are getting repossessed, people are loosing their jobs, and talk of humanity’s end is rife.
In those times, just remember the stock market has made its way through all sorts of challenges in the past, including two world wars. History shows that a period of going down is likely to be followed by a period of going up and that the going ups just about always go higher than the going downs went lower.
The bottom line
For some investors invest now seems crazy. For others waiting for a crash seems mad. In other words, it appears like a difficult decision to make, but it shouldn’t be. Nobody knows when the next crash is going to be. It might be tomorrow, it might be next year, it might be a decade from now. Waiting for a crash is a fools game. Without doubt you should invest now.
The more important question is should you invest all at once or drip feed into your investments. If you couldn’t handle your balance deteriorating for any length of time then drip feeding is probably the best option for you. The more you reduce your drip size and extend the time you drip for the less chance you have of being impacted by a major crash.
Those with iron stomachs, who don’t mind risk, and who want to get the best chance of achieving the highest investment returns may be better going all in as soon as you have money to invest.
