As the U.S. equity market climbed to new highs, many investors were left wondering if it was too late to get in on the ride. A common refrain is that we must be due for a market correction. After all, investors reason that it has been far too long since the markets have meaningfully declined.
To quote Sam Kinison in the 1986 film Back to School: “Is she right? ‘Cause I know that’s the popular version…And a lot of people like to believe that. I wish I could, but I was there.”
I was there in 2015: when the U.S. Federal Reserve inexplicably forecasted four interest rate hikes for the year ahead; when the yield curve flattened; and when the S&P 500 Index fell 14.16% from its May 21 peak—to its trough on February 11, 2016. Excluding four stocks—Facebook, Amazon, Netflix and Google—the market was down almost 16% over that time period. I was there when 40% of the stocks in the S&P 500 were down more than 20%. To say that we haven’t had a pullback is, in 2017 political parlance, an alternative fact.
Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.” In the trade we call that the opportunity cost—the benefit that a person could have received, but gave up, to take another course of action. He might as well have referred to the gains investors gave up by pulling $500 billion out of equity mutual funds and ETFs from 2009 to 2016, even as the market advanced by more than 200%. Even now, as money trickles back into the equity markets, far too many investors remain on the sidelines.
It’s the Murphy’s Law mentality of fearing that if anything can go wrong, it will. As soon as “I” get back in the market, the correction will come. President Trump won’t get his tax bill through Congress. Chancellor Merkel will lose the German election. The AFC just won the Super Bowl. (The Super Bowl indicator states that if a team from the American Football Conference wins, then it will be a bear market, but if a team from the National Football Conference or a team that was in the NFL before the NFL/AFL merger wins, it will be a bull market. Apparently no one told the market and the 2016 Denver Broncos of this theory.)
It’s possible a pullback will happen. Since 1981, every year but one (1995) has seen a correction of more than 5%. Still, stocks have been positive in 30 of these 36 years (Exhibit 1).
Let’s help investors to overcome that fear of getting in at the worst possible moment. Consider receiving a one-time lump sum payment of $100,000 on Friday, October 16, 1987—the eve of the famous Black Monday crash. If you had put your money that day in the S&P 500 Index, then by the following Monday it would have been worth $79,540. Ouch. However, by the spring of 1989, your investment would have surpassed $100,000 and more than $1.3 million today.
What if you instead decided to invest the money in the market in small increments and stored the rest of it safely in your house? Suppose you started in October 1987 and invested $1,000 every month (which might sound low for someone with a $100,000 windfall but actually amounts to almost twice the 401(k) annual contribution limit in 1987) for 100 months. By the end of October 1987 you would have been feeling pretty smart but less so today. That investment would now be worth $1 million, or $300,000 less than if you invested the full amount on the Friday before the worst one-day correction in market history (Exhibit 2).
As the saying goes, it is time in the market that matters, not timing the market. So in hindsight were the years 1987-1996 a great time to have your $100,000 fully invested? Of course they were. The NFC won the Super Bowl in every one of those years.
Compelling Wealth Management Conversations is a program designed to help provide philosophical and historical context and perspective to keep investors “buckled in” and stay the course during uncertain times (and when have times not been uncertain), while providing a framework to help identify the best opportunities going forward.
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These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.