Is Now a Good Time to Invest?

In our view now has nothing to do with investing. A long-term investor should always be rewarded for taking a risk with their capital. Otherwise, capital markets would cease to function. Therefore, it shouldn’t matter when you invest.

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.

As we have seen here, 2022 was a relatively bad year for investors and that means that future expected returns are higher not lower than before.

Markets are efficient in the sense that risk and expected returns are reflected over time. That means that security prices will adjust so that over the longer-term Stocks can be expected to outperform bonds.

This is entirely consistent with our expectations over time which can be illustrated with the following graphic

The message here is clear, those sat on the side-lines in cash deposits have an opportunity. This is to take advantage of both Stocks and Bonds going on sale at the same time, something which rarely happens.

As we set out in our guide to inflation, we are currently seeing prices rising at a rate not seen for 40 years and in 2022 savers in cash lost around 9% pa in real terms.

We are not suggesting that this is the very bottom of the current market cycle. 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 around its average measure of fair value since 1950. The market is not cheap like the spring of 2009, but it’s close to the average. Average annual returns from the S&P 500 since 1926 have been around 10% pa.

Source: Currentmarketvaluation.com

Short Term Investments

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 so you can review your savings strategy.

Begin the Investment Process

Given that it can take some weeks to clear the regulatory hurdles of opening a new investment account we are now recommending that we should be getting on with opening an investment account for some of the cash that you hold pending a revision of your longer-term investment strategy.

We would recommend a measured and prudent pacing of investments with at least two tranches of investment 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.

Interested in learning more about investing? Read our article on investing is simple or are you too late next.

Revisited November 2022 & January 2023