We recently asked our community to send us their money questions and we have started answering them here on Medium. If you have a question which we haven’t addressed yet, you can submit it here.
Question: Should I wait for the market to hit bottom before investing?
Investing in falling markets may seem counterintuitive or even downright scary to you especially when the media narrative is focused on economic recession, struggling businesses, and rising unemployment. History shows that falling markets present a good opportunity to acquire undervalued assets: In the US, an average bull market (or rising market) lasts 6.5 years and produces returns of 333% whereas a bear market (or declining market) lasts on average 1.3 years with losses of 38%.
If investing a lump sum now seems too risky for you, one option is to drip-feed smaller sums into your investment portfolio over several weeks to get a low average price and diversify your timing risk. No one knows exactly when a bottom will occur only that it will happen at some time.
However, there is no need to wait for a bottom and it is advantageous to start investing now. There are many reasons for this but the most important one is not when you invest but how you invest. I’ll explain why.
First, it’s difficult to determine when a market has bottomed — even professionals struggle to do this consistently because it’s not an exact science. A visit to the SPIVA statistics & reports website shows, as of 31 December 2019, over 77% of US and UK fund managers have failed to beat a benchmark index over the last five years. These fund managers have underperformed due to asset selection and market timing. If active fund managers were able to buy at the bottom and sell at the top with any success, more funds would outperform an unmanaged index.
Secondly, even in current conditions, not all financial markets such as equities, bonds, commodities & property are falling in price. For example, while equity markets have fallen to price levels last seen at the end of 2018, the gold price has risen to a seven and a half year high. So spreading your investment across a variety of markets that respond differently to factors such as economic growth or contraction, inflation, and interest rates reduces your risk of loss: You don’t have all your eggs in one basket.
This view is supported by a well known academic study which shows that over 90% of the returns obtained over time come from the allocation of assets within your portfolio. Therefore, the mix and quantity of assets in your portfolio are more important than market timing.
Keep an eye out — more questions and answers to come! In the meantime, submit your question here and we’ll make sure to respond.