When to start investing in stocks again

Even if this takes five years, and few doubt that the markets will have recovered in this timeframe, this would result in returns averaging 20% per annum over the period.

In all likelihood, a fair percentage of these gains will occur in the first year.

However, whilst everyone realises the opportunity, the current volatility is causing many to delay returning to the markets as they fear further falls.

Initially, this may look like a prudent move, but is it?

There is no denying that there is likely to be substantial volatility in the markets for the rest of the year.

We do not know whether the markets have hit a low and, if not, just how low the markets will fall. What's more, this will not become apparent until sometime after the event has happened because, whilst certain events do instantly influence the markets, as a whole the markets do not reflect the economic situation as it is today.

Reviewing previous recessions and financial crises, it becomes apparent that the financial markets start to recover in the quarter before we start to see an economic recovery on the ground. To put this another way, the markets seem to reflect what will be happening three to four months in the future. Consequently, even the most astute investor will only re-enter the market at the very bottom by luck.

Upward trend

Most people will decide to invest when they start to see the market bottoming out, or an upward trend beginning.

Others will wait even longer for a definite upward trend to emerge. Even if an investor is lucky enough to decide to re-enter the markets on the very day they reach their lows, in reality, it will take at least 10 days to choose an investment, complete the paperwork, courier this to the relevant financial institution, transfer the money, and allow this to clear the receiving account.

Only then will the broker make the trade. As such, the real questions that investors should be asking themselves are:

1. What will be the effect of missing the first 10, or 20, days of the rebound?

2. If I am in this for the longer-term, is it worth putting up with some short-term volatility in the coming months to ensure I do not miss the first weeks of the rebound?

There has been a multitude of research published which collectively shows that missing the 10 best performing days over any 10 year period reduces investment returns by over 25%.

Reduced returns

Likewise, missing the best 20 days reduces performance by over 50% and, even more incredibly, missing the best 30 days performance reduces returns by over 90%!

Other research has shown that in every stock market recovery since 1900, 25% of the first year's returns occur in the first 10 days of the rebound.

Those who miss the first two months of the recovery miss out on 50% first year's returns. Putting these two pieces of research together, it is fair to assume that many of the 10 best days of market performance will occur in the first days and weeks of the recovery so the effect of missing the first 10 or 20 days of the rebound would be substantial.

As mentioned earlier in this article, there is no denying that there be further volatility in the near future but any future falls will only be temporary and will only hurt the investor financially if these falls are consolidated by selling the investment.

Those who adopt the 'wait and see' approach will miss this volatility but they will also miss out on the substantial gains which have quickly followed virtually every stock market crash or correction.

See also:
2009; the year of the Greenback
Hedge funds caught in a downward spiral