The December edition of The Informed Investor highlights some financial market history and explores how to think about timing your investments.
Throughout the history of the stock market, people have often found reasons not to invest. You can find a list of those reasons here(PDF), put together by our partners at RBC Global Asset Management (RBC GAM)1.
Despite these reasons, with the benefit of hindsight we can see the common theme that global markets tend to stay on an upward course over the long term and tend to reward investors who stay the course.
We see that economic developments are mixed as we look around us today. According to RBC GAM’s chief economist Eric Lascelles’ most recent memo2, the positives include the U.S. economy’s resumed acceleration, the modest improvement in supply chain issues, and the likelihood that inflation will be temporary. On the negative side, current inflation remains high, the growth of developed countries other than the U.S. appears to be slowing, and COVID-19 infections in the developed world have begun to rise. In addition, the appearance of the new Omicron variant is causing significant concern.
Despite continued uncertainty around the pandemic and its economic effects, both emerging and developed markets remain significantly above their pre-pandemic highs – in particular, U.S. and Canadian markets have reached several new all-time highs3. And while investors generally like seeing the markets go up, it’s understandable that some are still wondering whether it’s a good time to invest. Should they hold off and try to time their contribution for a market dip?
“The reality is that even the most experienced money managers and investors are not really able to accurately time the market,” says George Brown, a Portfolio Advisor at RBC InvestEase. “Various studies have shown that the amount of time your money stays invested has a much greater effect on your long-term returns than how well you time the market.”
One such study by RBC GAM compared three investors in a balanced fund4. Investor #1 managed to invest their contributions at short-term market lows, while Investor #2 had the bad luck to invest at short-term market highs. Investor #3 simply invested the same amount at the same time each month. You can check out the surprisingly small difference in investment performance was for these three investors here.
When even most professional investors are unable to replicate the favourable timing of Investor #1, a sound strategy is to buy regularly over the long-term, like Investor #3.
It wasn’t part of the above study, but it seems safe to assume that Investor #3 also had more time to spend on the other things they enjoy, by ignoring trying to time the market all together.
If you have regular automatic recurring contributions going into your investments, you're already using that strategy. And if you don’t, RBC InvestEase makes it easy to set them up. With a few clicks, you’ll be able to choose the contribution schedule that works for you and the financial goals you’re aiming for.