Table of Contents
“Time in the market beats timing the market.” Repeat as frequently as required.
Case study 1: Benefits of starting early
Case study 2: Not attempting to time the market
7 Financial Freedom facts to free us from the fear of corrections and Crashes.
Corrections, Bear Market and Crash: What are the differences?.
On average, in the US market, corrections have occurred about once a year since 1900.
Nobody can predict consistently whether the market will rise or fall
The stock market rises over time despite many short-term hindrances.
Historically, bear markets have occurred every three to five years.
Bear markets become Bull markets, and pessimism eventually becomes optimism.
Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
“Time in the market beats timing the market.” Repeat as frequently as required.
You may have heard of this phrase many times before, so have I.
It took me many years to truly the understand the significance and impact of it.
Most people learn best through their own experiences and unfortunately the ones that sticks with us the most are the painful ones.
I came to realization that this is a phrase worth repeating as frequently as necessary since there are many timeless wisdom and boundless benefits to be reaped from applying it when it comes to investing in the markets. This article is to devoted to this purpose to delve deeper into it, and hopefully help you avoid lots of costly mistakes and generate more profits so you can reach your financial goals sooner.
Start early: Get in the market as early as you can and invest consistently without worrying about timing the market.
Here are 2 case studies to show why is it beneficial for us to get into the market as early as we can, and oftentimes the best investment fund deployment strategy is to just do it in a consistent manner without attempting so much to time our entry points.
Case study 1:
2 friends: Benefits of starting investing early
Here is a great example of the benefits of starting early when it comes to investing[1].
2 friends, Joe and Bob decide to invest $300 a month in an index which produce a return of 10% per year.
Joe ,who started at earlier = can afford to stop early
Joe started at 19 years old and stopped at 27 years old,
His total savings accumulated = $28,800
(8 years x 12 months x $300 = $28,800)
And just let his money continue to compound at the rate of 10% until he reaches 65 years old.
Amount he has when he is 65 years old = $1,863,287.
Total Returns on Investment: 6,370%
Bob, who started later = will need to continue saving for a lot more years
Bob on the other hand, started at 27 years old, with the same amount of $300 per month and does it until he retires at 65 years old.
His total savings = $140,400
(39 years x 12 months x $300)
But the amount he has when he is 65 years old is only $1,589,733
Total Returns on Investment of 1,032%
Although he has to save for additional 31 years more than Joe.
What if Joe did not stop investing until 65 years old?
Instead of stopping at 27 years old, if Joe would have continued investing until he is 65 years old,
He would have a nest egg of $3,453,020,
That would have given him additional $1.86 million because he started investing 8 years earlier.
Case study 2: 3 friends, Tiffany, Brittany and Sarah- Returns of those who attempted to time the market and those who did not.
Here is also a great article[2] from Personal Finance club to show that “Time in the market” beats attempting to time the market.
Tiffany- the “unlucky” one who has terrible market-timing ability
Brittany – the “brilliant” one, who has the best “market-timing” ability
Sarah – who just dollar-cost average and buy at the same time every month. Ends up with the highest return among them all!
And she spent the least amount of time and effort attempting to time the market.
Moral of the story:
Time in the market beats “Timing” the market, Invest early and invest often.
Don’t worry about attempting to enter at the right price,
Just be consistent with your deployment and you will do well over the long run (provided if the underlying instrument is good of course).
Start investing as early as you can, it is never too early or too late for you to start.
Be patient, trust the process, let time do its job.
Even though it is as little as few dollars a day, do not underestimate the amount which you can achieve over the long run if you remain consistent.
You can check out this article to show you how investing merely $10 a day for 35 years will gain you up to $4,476,540.
7 Financial Freedom facts to free us from the fear of corrections and Crashes
In this section here, I will touch on the The 7 Freedom Facts that free you from fear and anxiety on investing in the markets[3], from the book Unshakeable’s second chapter.
In my opinion, this chapter is a must read for anyone looking to be a successful investor in the markets over the long-run, as it will prime us psychologically and prepare us emotionally for the times of volatility which frequently lies ahead in the stock market.
Why is it important to study the past:
We know that the future will not be an exact replica of the past, but studying the past will give us a broad sense of these recurring patterns.
As the popular saying goes “History doesn’t repeat itself, but it rhymes.”
Understanding these past patterns will help us realize that corrections, bear markets and crashes are actually a feature of the market (meaning, normal occurrence time over time) which are nothing to be feared of, on the other hand, they are opportunities which investors ought to take advantage off.
Corrections, Bear Market and Crash: What are the differences?
Here are some of the terms you should familiarize with:
The 7 Freedom Facts to free you from fear of corrections & crashes:
1. On average, in the US market, corrections have occurred about once a year since 1900.
It is understandable why the news reporters would place a lot of coverage on gloom-ridden news like these since it garners more attention than optimistic events, and it is their job to draw you into their program.
Facts:
Historically, the average yearly corrections have lasted only 54 days, that is less than 2 months period.
It’s important to note that, in the average correction over the last 100 years, the market has fallen only 13.5%.
In the past 36 years though, from 1980 through the end of 2015, the average drop was 14.2%.
So if you think about it, we will most probably experience the same number of corrections as our birthdays going forward.
Smart thing to do instead:
Hence instead of panicking and selling our positions, these are actually a good time for us to take advantage of the market volatility by buying more at cheaper valuations, these can indeed turn out to be some of the best gifts we can get for ourselves every year.
Corrections are nothing to be feared, they are just a feature of the market and are something to be expected rather consistently.
2. Less than 20% of all corrections turn into a bear market
In other words, 80% of corrections do not turn into bear market (prices fall 20% from their all-time high).
Once you understand this, you will realize that it there is no need to panic, and cash out on your positions whenever corrections take place.
Instead, again, you would realize that from a probability standpoint, this would be a good opportunity for you to add more positions to your portfolio at cheaper valuations.
Since most of the corrections are only temporary.
3. Nobody can predict consistently whether the market will rise or fall
Warren Buffett has said, “The only value of stock forecasters is to make fortune-tellers look good.”
Merchants of doom:
Take a look at the 33 failed predictions by the “market forecasters” below.
Each of the numbers below corresponds to the date of the prediction in the graph. The common pattern is they’re all predicting that the market will go down when it’s actually going up.
1. “Market Correction Ahead,” Bert Dohmen, Dohmen Capital Research Group, March 7, 2012.
2. “Stocks Flirt with Correction,” Ben Rooney, CNN Money, June 1, 2012.
3. “10% Market Correction Looms: Dig in or Bail Out?,” Matt Krantz, USA Today, June 5, 2012.
4. “A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction,” Nouriel Roubini, Roubini Global Economics, July 20, 2012.
5. “Prepare for Stock Market Crash 2013,” Jonathan Yates, moneymorning.com, June 23, 2012.
6. “Dr. Doom 2013 Prediction: Roubini Says Worse Global Economic Turmoil Approaching; Five Factors to Blame,” Kukil Bora, International Business Times, July 24, 2012.
7. “Watch out for a Correction—or Worse,” Mark Hulbert, MarketWatch, August 8, 2012.
8. “We think we are set up for an 8–10% correction in the month of September,” MaryAnn Bartels, Bank of America–Merrill Lynch, August 22, 2012.
9. “It’s Coming: One Pro Sees Big Stock Selloff in 10 Days,” John Melloy, CNBC, September 4, 2012.
10. “Warning: Stock Correction May Be Coming,” Hibah Yousuf, CNN Money, October 4, 2012.
11. “I’m going around town telling my hedge fund clients that the US economy is headed into recession,” Michael Belkin, Belkin Limited, October 15, 2012.
12. “Fiscal Cliff Blues May Lead to Correction,” Caroline Valetkevitch and Ryan Vlastelica, Reuters, November 9, 2012.
13. “Why a Severe Stock Market Correction’s Imminent,” Mitchell Clark, Lombardi Financial, November 14, 2012.
14. “By summer, we get another crash,” Harry Dent, Dent Research, January 8, 2013.
15. “A Stock Market Correction May Have Begun,” Rick Newman, U.S. News & World Report, February 21, 2013.
16. “Sluggish Economy May Signal Correction,” Maureen Farrell, CNN Money, February 28, 2013.
17. “I think a correction is coming,” Byron Wien, Blackstone, April 4, 2013.
18. “Market’s Long Overdue Correction Seems to Be Starting,” Jonathan Castle, Paragon Wealth Strategies, April 8, 2013.
19. “5 Warning Signs of a Coming Market Correction,” Dawn Bennett, Bennett Group Financial Services, April 16, 2013.
20. “Stock Market Warning Signs Becoming Ominous,” Sy Harding, StreetSmartReport.com, April 22, 2013.
21. “Don’t buy—sell risk assets,” Bill Gross, PIMCO, May 2, 2013.
22. “This may not be the time to sprint away from risk, but it is the time to walk away,” Mohamed El-Erian, PIMCO, May 22, 2013.
23. “We’re due for a correction soon,” Byron Wien, Blackstone, June 3, 2013.
24. “Doomsday poll: 87% Risk of Stock Crash by Year-End,” Paul Farrell, MarketWatch, June 5, 2013.
25. “Stock Shrink: Market Heading for Severe Correction,” Adam Shell, USA Today, June 15, 2013.
26. “Don’t Be Complacent—A Market Correction Is On Its Way,” Sasha Cekerevac, Investment Contrarians, July 12, 2013.
27. “For Two Months, My Models Have Told Me That July 19th Would Be the Start of a Big Stock Market Sell-Off,” Jeff Saut, raymondjames.com, July 18, 2013.
28. “Signs of a Market Correction Ahead,” John Kimelman, Barron’s, August 13, 2013.
29. “Correction Watch: How Soon? How Bad? How to Prepare?,” Kevin Cook, Zacks.com, August 23, 2013.
30. “I Think There’s a Decent Chance Stocks Will Crash,” Henry Blodget, Business Insider, September 26, 2013.
31. “5 Reasons to Expect a Correction,” Jeff Reeves, MarketWatch, November 18, 2013.
32. “Time to Brace for a 20% Correction,” Richard Rescigno, Barron’s, December 14, 2013.
33. “Blackstone’s Wien: Stock Market Poised for 10% Correction,” Dan Weil, Moneynews.com, January 16, 2014.
My own experience as a victim
I have personally experienced this first-hand as a victim myself,
In 2015, the main host from a personal finance podcast which I listened to frequently was so certain that an EPIC STOCK MARKET CRASH was going to come during that or the year after and strongly urged investors to exit or minimize their positions in the market and shift their assets to holding Gold or Silver or to hold cash instead.
The main host’s reasoning for this was due to a possible scenario called the Baby Boomers Meltdown. Which basically means that when baby boomers start withdrawing their investments from the market to prepare for their retirement, that will cause a lot of selling pressure in the market which will cause a meltdown in the stock market. His thesis made a lot sense to me at that time.
And I was just saving my bullets, waiting for the “right time” to enter the market to reap the best gains possible.
Every time when a stock market correction took place, I was thinking inside to myself: “This is it.. It is finally happening! The market will continue to fall to its lowest point in the past few years and I will then be able to buy all my favorite companies at extremely attractive valuations!”
But the period from 2016 to 2020 ended up being one of the best bull-run in the history of the markets.
Looking back in hindsight, if I just stay invested in the companies which I had researched well during that period and “Do Nothing” until now, my gains would have been phenomenal (I would have average at least 30% annualized returns for the stocks in my portfolio).
Halfway through 2015, there was a correction in global markets which caused the Dow Jones to fall up to 13%.
I got spooked by the correction, and I thought that the imminent “MAJOR CRASH” was coming.
I sold off almost all of my stock holdings, one of which was my favorite company at that time, Vitrox, a manufacturer of inspection machines for semiconductor industries.
Planning to re-enter the market again when the stock market has reached a bottom low to maximize on my capital gains.
That anticipated day did not come.
And if I would have just held on to my stock instead of selling it, I would have gained up to a total of 854% returns of it in a mere 6 years’ time, that is averaging of 47% CAGR per year.
“It’s good to learn from your mistakes. It’s better to learn from other peoples’ mistakes”- Warren Buffett
Also, what I did not realize back then was that, if there are willing buyers to buy the stocks when the baby boomers do indeed start selling their stock holdings in the future, the stocks prices would be prevented from the free-fall which was predicted to happen.
The stock prices could even increase if the level demand for the companies is getting higher as time goes by.
This is particularly the case when the constituents of major indices like S&P500 are replaced with more innovative and technology-focused companies who are able to scale better and experience longer periods of growth like Microsoft, Amazon, Facebook, Google, NVIDIA and Adobe in comparison to the old-economy stocks which were more popular during baby boomers’ period of investing, around 1976 such as – 3M, Ford, Procter & Gamble, Caterpillar, etc.
As long as innovation keeps taking place, I believe there will always be room for the market to continue to grow.
For example, the younger generation of investors now have a different approach to investing, they favour innovative companies and support founders whose mission is to improve the lives of humanity and preservation of the environment.
Furthermore, there could also be a chance that many baby boomers may not sell their stocks when they retire if the stocks they owned for many years now are starting to pay lucrative dividends which can support their lifestyle expenses after they retire and at the mean time they can still obtain capital growth too.
Refer to this section of the first article.
(Smart thing to do instead when the market goes through a correction):
Just continue to dollar cost average as usual, and if the market crash really happened, don’t be afraid to take lion bites.
It can be a wise strategy to live more frugally during this period and save more of your income to invest in the companies which are trading at more attractive valuations now.
These are usually great opportunities to springboard ourselves into reaching our financial goals sooner (provided if the underlying fundamentals of the companies which you decide to buy into are solid, that is!).
4. The stock market rises over time despite many short-term hindrances.
Fact:
In the 36 years period from 1980 to 2015, the S&P500 experienced an average intra-year decline of 14.2%.
What this means:
In other words, it is expected that the markets will fall up to 14.2% every year.
Nothing to be concerned of- it is just one of the features of the stock market.
But what really placating is that the market ended up achieving a positive return in 75% of the time, that is 27 of those 36 years.
Light grey dots represent the lowest the market went, and the dark grey bars represent where the market ended the year.
What can we learn from this?
This is important because it reminds us that market generally rises over the long run.
Provided if the market (most importantly the country of the stocks or indices you choose to invest in) is proven to have successful track records of:
I. Continuous innovations in the past
II. And/or shown to frequently providing goods & services which:
a. improves the lives of humanity
b. and/or provide goods & services which their customers LOVE
(Hence having the ability to generate strong branding power for themselves and create
loyal following from their customers.)
In which the United States market is a good example which is able to meet all the criteria stated above.
5. Historically, bear markets have occurred every three to five years.
Facts:
i. In the past 115 years between 1900 and 2015 there were 34 bear markets (where the market fell by 20% from their all-time highs).
ii. More recently, bear market have occurred slightly less often: in the 70 years since 1946, there have only been 14 of them.
What these means:
On average, market falls more than 20% nearly once every 3-5 years.
Bear markets do not last, on average, they lasted about a year.
So, if you are 30 years old and could live up to 100 years old,
You could easily face up to another 17 bear markets.
So you should prime yourself not to worry about them.
Market crashes are like roller coaster, it is expected to fall but it will eventually go back up again. You just need to ride it through, instead of jumping out of it when it is falling. If you do not jump off the rollercoaster, you will be fine.
What can we learn from this?
1. Understand that Bear markets, just like the seasonal winters do not last, springs (good times) always follow.
2. Take advantage of the market dips and don’t do panic selling when prices fall.
however do ensure that the underlying fundamentals of the companies are still intact and that the valuation is still in justifiable range before "buying the dip".
“The best opportunities come in times of maximum pessimism” - John Templeton
6. Bear markets become Bull markets, and pessimism eventually becomes optimism.
As you can see in the table below, for every bear market bottom, the market eventually rose by a rather significant amount in the following 12 months period.
Now we can understand why Warren Buffett says that he likes to be greedy when others are fearful.
One thing to note is that the stock market is always forward looking, what matters most isn’t where the economy is now, but where it is potentially headed into the future. This is also similar to why many investors buy into companies that have great growth prospects going into the future.
In fact, every single bear market in US history has been followed by a bull market, without exception.
Time after time, bad times have eventually been followed by good times.
As for other developing and developed nations, many of them follow similar patterns too.
But Japan on the other hand has had a tougher experience, their Nikkei 225 hit a high of 38,957 in 1989 and 31 years later, it is still 26% down from it’s all time high.
If you would like to learn more about Japan’s economy crises during this period, you can find out more here on these articles here 1. Japan’s lost decade
7. The greatest danger is being out of the market.
Many people I know of, including myself in the past have always done the costly mistake of thinking that it would be a better strategy to sit on the side lines, and wait for a “better time” to enter because the market is quite close to or just hit its all-time high.
In fact, US markets hits an all-time high on approximately 5% of all trading days. On average, that is once a month.
What we do not realize is that, sitting on the side lines and being out of the market even for short periods of time can be the costliest mistake of all. As shown in this chart below, missing just a few of the market’s best trading days can bring a devastating impact on our returns!
If you invested in the S&P500 from 1996 to 2015, you would achieve an average return of 8.2% per year.
But if you just missed out the top 10 trading days out of those 20 years (which is equivalent to only about 0.14% of the total duration), your returns would decrease to merely 4.5% a year!
The message is clear, the greatest danger is being out of the market because we just never know which days the market will bring about the most gains.
Hence one of the most fundamental rules for achieving successful investing results is to stay in the market for longer period of time rather than attempting to time it.
“Don’t do something; just stand there!” - Jack C. Bogle
Closing
This marks the end this article. On the next article, I will touch on some basic guidelines on how to identify companies which you can hold for the long-term.
Subscribe here to be notified when it is released.
Till then, stay in the markets my friends.
[1] Unshakeable, by Tony Robbins, Simon & Schuster, 2017, pp. 45–46.
[2] Imgur. “Timing the Market: The Absolute Worst vs Absolute Best vs Slow and Steady - Album on Imgur.” Imgur, imgur.com/gallery/BlK4jzM.
[3] Robbins, Tony, et al. Unshakeable: Your Guide to Financial Freedom, by Tony Robbins, Simon & Schuster, 2019, pp. 43–72.
[4] Baldwin. “BE GREEDY WHEN OTHERS ARE FEARFUL.” Silkinvest, Silkinvest, 2 Oct. 2018, www.silkinvest.com/content-archive/2018/9/23/be-greedy-when-others-are-fearful.
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Found this article on Google and now I'm reading all your writings, very nice one! Kudos :D