In one of the early seasons of The Simpsons, when Homer has doubts about the opportunity he’s won to become a NASA astronaut, Marge tells him that if you don’t take advantage of opportunity you may regret it for the rest of your life. Homer responds, “You’re right Marge. Just like the time I could have met Mr. T at the mall. The entire day, I kept saying ’I’ll go a little later, I’ll go a little later...And when I got there, they told me he had just left. And when I asked the mall guy if he’ll ever come back again, he said he didn’t know. Well I’m never going to let something like that happen again!’” And with that Homer went to space.
Far too many investors over the past nine years have promised to invest a little later, only for the broad U.S. equity market to advance by roughly 300%. Many missed the market’s moon shot. Now they question if it is too late to put money to work. The recent drawdown in markets has only exacerbated concerns.
From a strategy perspective, one can reason that it is likely not too late:
- The global economy is still relatively strong and the United States still has a significant amount of fiscal stimulus coming in the second half of the year.
- The yield curve is flattening but long rates are trending higher, a less ominous sign than if long rates were falling. With inflation still relatively benign, the Fed may have cover to tighten policy at a more gradual pace than the market currently expects.
- Even if we are in the last years of the secular bull market, markets tend to do well in the last 24-36 months of the cycle anyway.
In reality, investors with a long-term time horizon should pay little attention to the cyclicality of markets. In our newly launched financial literacy program, we highlight the benefits of automating investments by directing a portion of every paycheck go to investment accounts. Doing that enables you to pay yourself first before you spend the money, to put the money out of sight and thus out of mind, and to take the emotion out of the equation. If stocks go down you simply buy more of them at cheaper prices. It’s a simple concept, but far too few people do it.
Consider the following example of a worker earning $35,000 in 1980 and saving and investing 10% per pay period in U.S. stocks over a 35-year career, a period which includes the 1987 crash, the 1991 recession, the 2000 tech wreck, and the 2008 financial crisis. At the end of 35 years, the worker’s account balance would be over $1.4 million (using the S&P 500 Index as a proxy for U.S. stock returns)
On the other hand, if the investor instead made annual contributions and failed to contribute in 5 of the 35 years for various reasons (pay for wedding, the expense of having children, fear of the market, etc.) the result in this example would be $500,000 less, and far more for many workers at today’s wages. As Homer would say, “D’oh!” That’s enough money for tickets for you and a friend to tour space on Virgin Galactic’s Spaceship Two.
Investors are always looking for advice. The best response I’ve heard is to work hard and automate your investments. Or you can take Homer’s advice to Bart: “Son, if you really want something in this life, you have to work for it. Now quiet! They’re about to announce the lottery numbers.”
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value. Automatic investment plans do not ensure a profit nor do they protect against a loss in declining markets.