Friday, May 16, 1997
[today we revisit a fribble from September 1995]
So You Say Your Luck
Is Awful?
by
TMF Sheard
With the stock market at record levels, it's only natural for investors to be nervous about committing new funds. "What if I take this chunk of money and invest it the day before the market crashes?" And you will agree, a reasonable question, but one which most apocalyptic visionaries don't address in realistic terms.
The question was raised this week in the Investing for Growth folder after a discussion of the model's best and worst quarters. What would happen if an unlucky soul invested his or her $50,000 in the IFG model as the fourth quarter of 1987 began, right before the October crash, in other words?
Interestingly enough, the results of such "misfortune" aren't nearly as gloomy as one would expect. It would have taken just under two years to recover from the 23% loss suffered by the model. But despite that setback, the returns have still been market-beating. In the period beginning right before the crash until the present (roughly 8 years), the model returned a compound annual return of approximately 24%, more than double the stock market averages.
But let's forget 1987 as a single example. In fact, let's forget Investing for Growth altogether for a moment and set our sights much lower. What would happen if you had consistent bad luck over the last number of market drops and only invested in the index funds which mirror the market returns?
A very interesting article in the September issue of Smart Money addresses just such an unfortunate scenario. Author Jersey Gilbert analyzes the results of investing $10,000 at exactly the wrong time in each of four different years (the wrong time simply being that year's market peak for the S&P 500). The four dates were January 1973, January 1977, December 1980, and August 1987.
In all four cases, leaving the investment in the S&P 500, despite the drop right from the start, would have produced a better return than T-bills over the succeeding 15 years (or 8 years in the case of the 1987 drop). The 1973 investment would have taken the longest time to catch up to the T-bill investment, 12.8 years. The other three "bad" investments all managed to catch up to their rival T-bill investments in far less time. (The 1977 investment took 5.9 years, the 1980 investment 4.1 years, and the 1987 investment 4.3 years.)
Let's say your timing is even worse, however. You managed to invest $10,000 each year since 1979 on precisely the worst day of the year (that is, the peak). Don't ask us how you were that unlucky, but let's say you were. That $160,000 investment ($10,000 for 16 years) would still have grown to $540,000, compared to the T-bill portfolio which would be worth less than $280,000.
The point, of course, is that if you're a long-term investor, even one with atrocious timing year after year, you're still better off IN the market than out of it. And of course, we hope and trust that you'll do better than the S&P 500 return while you're in the market. It would be too Wise not to.
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