"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness..."
― Charles Dickens, A Tale of Two Cities
Stock market volatility is the new normal, the major indexes float near record highs, the country is gripped by crisis, and political turmoil dominates the headlines. Should a person ride the stock market even higher, or sell while the getting is good and wait on the sidelines for the next crash?
While the scenario above reflects our current world and the questions about market timing – when to buy, when to sell, when to wait it out – are hotly debated, some historical context can provide a simple solution: keep investing through good times and bad.
The Great Recession
I made the decision to leave my job as a recording engineer in favor of more promising (and profitable) opportunities as a touring audio engineer in 2008. My recording studio salary had been enough to pay my bills in relative comfort for several years, but it was not until 2008-09 that I started earning a decent income.
Of course, this was in the midst of the housing market collapse, which would lead to a stock market collapse, which would lead to The Great Recession. If ever there was a time to avoid having money tied up in the market, that was it.
If I had invested $1,000 in an S&P 500 market index fund on 09 Oct 2007 – the market peak before the crash, the absolute worst time to invest – that investment would now be worth $2,451, a 245.1% increase.
The Dot-Com Bubble
I turned 21 while playing a concert at one of the only bars in town that let local bands book shows. I was accustomed to entering through the back staircase and, having been a regular performer there for years, rarely had my ID checked. I remember the look on my favorite bartender's face when my age was revealed – a mixture of amused and angry.
There was also a massive market sell-off on the previous date – my birthday is on Tax Day – as investors sold stocks to pay taxes on gains realized in the previous year. This was the midst of the Dot-com Bubble, in which the valuations of tech stocks – which had soared as investors piled in with "irrational exuberance" – plummeted 78% in seven months. If ever there was a time to avoid having money tied up in the market, that was it.
If I had invested $1,000 in a NASDAQ 100 index fund on 10 Mar 2000 – the market peak before the crash, the absolute worst time to invest – that investment would now be worth $2,665.31, a gain of 266.5%.
I was very interested in post-season baseball in the autumn of 1987. My beloved Detroit Tigers – having won the championship three years prior – finished the regular season with the best record in baseball. Despite having power hitters Chet Lemon, "Sweet" Lou Whitaker, and Kirk Gibson (who would depart the following year for the Los Angeles Dodgers), the legendary double-play duo of Alan Trammell and Whitaker, and all-star pitcher Jack Morris on the mound, the Tigers fell 4-1 to the Minnesota Twins.
One week later, the Dow Jones Industrial Average would lose 22.6% in a single day, the largest single-day percentage drop up to that point. The date would earn the grim nickname Black Monday. If ever there was a time to avoid having money tied up in the market, that was it.
If I had invested $1,000 in a DJIA index fund on 25 Aug 1987 – the market peak before the crash, the absolute worst time to invest – that investment would now be worth $11,273.87, a gain of 1127.4%.
I don't remember the late 70s – Jimmy Carter was President when I was born, but I have no memory of it. However, my maternal grandparents – staunch Republicans – were happy to inform me that the economic events preceding my birth were all the Democrats' fault. The OPEC oil embargo, high inflation mixed with slow economic growth – called Stagflation, and the Iranian revolution and American hostage crisis had left the economy battered. The Dow Jones Industrial Average had barely moved in ten years, gaining 5% for the whole decade. If ever there was a time to avoid having money tied up in the market, that was it.
If my grandparents had invested $1,000 in a DJIA index fund on the last date of the decade – 31 Dec 1979 – that investment would now be worth $36,587.60, a gain of 3,658.8%.
Invest early and often
Every stock market crash was preceded by a period of growth. People asked themselves similar questions to the ones we ask today. Is this the right time to buy? What if I invest now and the market crashes next week? What if I miss a big opportunity to buy or fail to sell before a calamity?
Investing right before a market-wide drop is tough to stomach. There is a lot of second guessing, feeling foolish, wondering if it is possible to recover. Plenty of people throw in the towel, deciding that they have had enough. Plenty others wait on the sidelines when the market is going up – waiting for the next crash to buy – and many of those same people are still on the sidelines when the market drops – waiting until things calm down to buy.
The idea of timing the stock market – knowing when to buy, when to sell, being able to anticipate movements and spot trends before others – is alluring, but it is also an illusion. There are too many factors at play to truly know if, when, or how the markets will react – positively or negatively.
It is a simple fact: if a method existed for reliably knowing when to buy and when to sell, we would all use it and the markets would be predictable. The fact that they are not predictable is exactly why it pays – pun intended – to consistently invest, through good times and bad, year after year, decade after decade.
Short-term stock market drops are brutal. Less visceral are the long-term gains that come to those who invest early and often. Instead of focusing on when to buy, instead focus on what to buy, how long to own it, and resolve to do that again and again and again for as long as you can. It is not only one of the simplest strategies for investing, but also one of the best.
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.