The problem for investors is that no one rings a bell telling us when the market has hit the bottom. Therefore, there is always some uncertainty when making any investment. The good news, however, is that this isn’t a bug in the investing process, it’s perfectly normal and simply a feature of being an investor.
Predicting the Future
The lack of perfect information (let’s call it a crystal ball) upon which to base investment decisions is what drives returns for investors in the first place. If there was no uncertainty (let’s call it risk), there would be no reason for investors to expect a higher return when making an investment decision.
The first 6 months of this year have been relatively ‘bad’ for investors. This means that those holding cash are more fortunate than normal, having dodged some difficult market conditions, as shown in the table below.
However, let’s look at the slightly longer term, 2-year returns. This data include the recovery from the sell-off in the spring of 2020 when the Coronavirus Pandemic hit the markets and the results have been extremely strong for investors compared to savers.
The five-year returns are also very strong, despite including both the 2020 fall and the current market falls. This is entirely consistent with our expectations over time which is illustrated here:
The message here is clear, those sitting on the side-lines in cash deposits have an opportunity to take advantage of both Stocks and Bonds going on sale at the same time. This is something that rarely happens.
As we set out in our latest Guide to Inflation, we are currently seeing prices rising at a rate not seen for 40 years. Savers are now losing in excess of 9% pa in real terms from cash deposits. This gives a sense of urgency not seen in decades to move some of this cash away from the side-lines.
We are not suggesting that this is the very bottom of the current market cycle, as we have no way of knowing when that will happen. However, we can use history as a guide. As the chart below shows, declines tend to be short-lived.
We can also see that the US Market is currently below its average measure of fair value based on the last 25 years. The market is not really cheap like the spring of 2009 but it’s not far off it.
Source: JP Morgan
Naturally, you should not invest cash that you need for short-term spending or gifting. Any investment horizon under 5 years should be held in State Savings Certificates. Keep an eye on any new issues that might have a higher interest rate in future and move funds accordingly.
Begin the Investment Process
Pending a revision of your longer-term investment strategy, we recommend that you make a start on opening a new investment account, if you are holding a significant amount of cash on deposit. Given that it can take some weeks to clear the regulatory hurdles and process the application.
We would recommend a measured and prudent pacing of investments with at least two tranches of investment. Ideally 3 months apart, just in case conditions continue to deteriorate in the short-term.
What’s the risk?
An investment decision made today and looked at over a reasonable time period, is unlikely to lose money if history is any guide at all.
Further information can be found in Our Guide to Investing in Ireland Download Guide