Started from the Bottom Now We Here
By Elijah Souza
A wise poet once said, “CONGRATULATIONS… work so hard, forgot how to vacation”. Ok, maybe that wise poet was Post Malone and what has been working so hard has been the S&P 500.
Wednesday, August 22, 2018 marks the longest bull market in history (a bull market is defined as a rise in stocks by 20%). Since the bottom on March 9, 2009, the S&P 500 has gone 3,453 days without a bear market (a bear market is defined as a decline in stocks of 20%).
This is not to say that the ride has been a smooth one. The bull market narrowly survived a few close calls. There was the downgrade of America's credit rating in 2011, the feared collapse of the euro, China's alarming economic slowdown and the dramatic crash in oil prices. Truth is the S&P 500 Index corrected more than 20% intraday back in 2011, and in February 2016 the median S&P 500 stock was down 25% (as the S&P 500 slid 14.2%). In other words, we’ve had what felt like a few bear markets along the way.
So the big questions are where do we go from here and what should YOU do with your investments now?
Based on feelings and emotions, it is easy for one to think, “sell now because the market must be near the top since this is the oldest bull market ever”. Let’s assume that this is the top but instead of selling everything, what if you were to start buying stocks today?
In 2014, institutional portfolio manager and financial writer Ben Carlson analyzed what would happen if an investor held the crown of the world's worst market timer over the past several decades?
He named this investor "Bob" and Bob is definitely the world’s worst market timer. Bob began his career in 1970. With Bob’s luck, he made his first investment of $6,000 into the S&P 500 in December 1972, right before a 48% crash in the market.
Over the next 14 years Bob saved a total of $46,000 in cash and decided to invest into the S&P 500 in August 1987, right before a 34% crash.
During the next 12 years, Bob saved a total of $68,000 in cash and decided to invest into the S&P 500 in December 1999, right before a 49% crash.
8 years later, Bob saved a total of $64,000 in cash and decided to invest into the S&P 500 in October 2007, right before a 52% crash.
No doubt, Bob was unlucky with his timing. However, he did have one saving grace. Once he was in the market, he never sold his holdings. He held on for dear life because he was too nervous about being wrong on both his sell decisions too. Remember this decision because it’s a big one.
After all of that, Bob retired at the end of 2013. So how did "Bob" do after these 42 years of epic market misfortune?
Actually, he made money. Even though he only bought at the very top of the market, Bob turned the $184,000 he invested over the years ($6,000 in 1973, $46,000 in 1987, $68,000 in 2000 and $64,000 in 2007) into $1.16 million—for a total profit of $980,000.
And if he would have simply dollar cost averaged into the market on an annual basis with his savings he would have ended up with much more money in the end (over $2.3 million).
Obviously, this story was for illustrative purposes and past performance is not indicative of future results. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
However, rather than trying to time exactly when this bull market will end. The better question to ask ourselves is what can we learn from Bob’s journey?
1. Keep your time frame in mind when making investments. If you are planning on needing your savings in the next 5 years, it would be unwise to invest your savings into a 100% stock portfolio. On the other hand, if you have a few decades to save towards retirement, long-term thinking has been rewarded in the past and unless you think the world or innovation is coming to an end it should be rewarded in the future.
2. Losses are part of the deal when investing in stocks. How you react to those losses is one of the biggest determinants of your investment performance. If you decide to sell in hopes of timing the market correctly, you also have time it right again when you decide to get back into the market.
3. Put a plan in place that works for you. Hopefully, this plan allows you to save more over time, think long-term and take advantage of using compounding interest to work in your favor.
Even if you are the next “Bob” and only now consider buying stocks, having a customized plan for your specific situation can help you grow your wealth over the long run. Even if you’re unlucky and prove to be the second-worst market timer ever.
Securities offered through LPL Financial, Member FINRA(http://www.finra.org/)/SIPC (https://www.sipc.org/).
Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor. Gerber Kawasaki and Gerber Kawasaki Wealth and Investment Management are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
All performance is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted.
Stock investing involves risk including loss of principal. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price level. Such a plan does not assure a profit and does not protect against loss in declining markets.
Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393