You are funny sometimes.
Published at 7:00 a.m.
When the financial markets are falling, you don’t want to invest because the fall is just beginning and it’s better to wait.
And when the markets are peaking, you don’t want to invest just because there’s going to be a drop and it’s better to wait.
So you wait for falls in markets where they are short and rare. I would rather warn you: this is not a formula for wading through a mountain of greenbacks like Uncle Scrooge.
But I understand where it comes from.
In the popular imagination, investing is a bit like going to the store to buy something you need. Let’s say, an air fryer.
What’s better than an air fryer? A hot air fryer on sale. So we’re waiting for Black Friday.
It’s human. We want to make the “right” decision. Minimize the risk of regret. Eliminate the “so I should have”.
With a fryer, it works. But with our investments? It doesn’t work. It’s our brain playing tricks on us.
To put your chances in your favor when investing, you have to learn to think a little less like a human shopping for a hot air fryer, and a little more like a factory that makes them.
Imagine a factory in China. It’s filled with metal presses, injection molding machines, robots that apply non-stick coatings or layers of paint… All these machines work together in an assembly line to make air fryers.
Is this assembly line wondering if Tuesday is a better day than Thursday to make fryers? Or whether it’s better to make fryers before or after the US election? Before or after the time change? Before or after Taylor Swift shows in Toronto?
(OK, I’m a 47 year old male and this is my second Taylor Swift reference this fall. Am I becoming a Swiftie?)
The factory has no opinion. It manufactures hot air fryers. That’s all. We should do the same thing with our investments.
Best days
“Yes, OK,” you say. But this is different! The markets are euphoric! A fall is sure to come! »
It’s true that the markets are at peaks. The Toronto Stock Exchange has climbed 20% since the start of the year. In the United States, we are talking about an increase of more than 25%.
The S&P 500, the index that represents the 500 largest companies in the United States, has closed at record highs more than 50 times this year. The year 2024 is the seventh best year for the number of record days in almost a century.
This should all be scary, right?
In fact, this is all normal. Let me explain.
Since 1924, the annual return most often observed for the Toronto Stock Exchange has been between 20% and 30%. Such a return has occurred in 21 of the last 100 years, so one year in five.
In the United States, an increase of 25% or more has historically occurred one in four years.
These returns seem exceptional to us. But, by definition, something that has happened one year in four or one year in five for a century is not exceptional.
Also, it’s counterintuitive, but the highs have been excellent times to enter the markets.
According to a JP Morgan analysis conducted from 1988 to 2020, an investment in the S&P 500 index made on a record high day was up 14.6% on average after one year. But an investment made on a randomly chosen day was up 11.7% on average a year later.
After five years, the investment made at the top saw growth of 79% on average, compared to 71% for investments made on a random day.
I think we have a bad perception of the robustness of the markets because the falls make the headlines, but the rises go unnoticed.
Everyone remembers that the markets fell violently in 2020, at the start of COVID-19.
But how many people know that $10,000 invested just before the COVID-19 crash in a “growth” exchange-traded fund composed of 80% Canadian, American and international stocks, and 20% bonds, worth $14,900 today?
An average annualized return of almost 9%. All this despite the pandemic, high inflation, the historic rise in rates, etc.
So how do you invest when markets are at peaks?
The same way we invest when the markets are at a trough.
It is best to invest regularly in a diversified and balanced portfolio composed of Exchange Traded Funds with low management fees which gives us exposure to Canadian, American and international stocks, as well as bonds.
What if a drop occurs? We continue to invest in the same way, at a better price. Those who did it in 2008, 2020 and 2022 are happy to have followed their plan today.
The best investors are not geniuses. The best investors are able to do something routine and forget about it.
Do you find investing exciting? You are probably making a mistake.
Investit must be flat. Like an assembly line.
