Should I wait for a market downturn to invest cash?
Equity markets have rallied robustly this year, boosted by growing hopes for a near-term end to the rate hiking cycle and euphoria surrounding the prospects for artificial intelligence (AI). At the same time, perhaps the greatest concern at the outset of the year — a recession — has failed to materialize thus far as inflation has fallen sharply without a major hit to the jobs market, sustaining real consumer spending growth. Against the strong year-to-date performance in risk assets, investors with excess cash to invest may be skeptical about putting it to work until a more favorable perceived entry point arrives.
That approach may seem intuitive but comes with its own risks. Waiting for the perfect time to invest can result in missing out on periods of solid stock market returns. Fear of buying at a top can lead to the opportunity cost of sitting in cash as equities march higher, as they’ve done historically in about 75% of all calendar years.
As shown in the chart above, history would suggest that in the long run, the difference between picking the best and worst entry points does have an impact on performance, but it’s not as significant as one might expect, particularly over the long term. We illustrate the timing impact of consistently investing since the year 2000 on the first day of the year, the highest point in the market (worst timing), and the lowest point (best timing). Unsurprisingly, if you could achieve the impossible task of always investing at the market low each year, your return is maximized. Even if your timing was abysmal — investing each year at the top of the market — the power of compounding and being in the market would still have been tremendously beneficial compared to sitting in cash.
Waiting for a dip means potentially leaving return on the table. Investors will rarely get the timing right, but even if it’s poor, being invested – and taking risk – should pay off over time.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
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Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.