Investment success generally depends more on time than timing.
While most of us don't have the ability (or luck) to consistently time the market - buying low and selling high - we can allocate our investments according to the time needed to grow, and hopefully recover from any market slumps. For example, if you might need cash over the next few years to make a major purchase (education, car, home, travel, transition to retirement and so on), you should probably leave that money in a money market fund or relatively short-term guaranteed deposit.
The low interest rate of perhaps one to two per cent (and an after-tax return which won't even keep up with inflation) is the price you pay for safety and knowing you can access all that money when you need it.
Only when you won't need money for a longer period should you consider the stock market, real estate, a business, collectibles and so on. But then the question is: "How long?" If you are a conservative investor, the minimum time horizon would generally be five to 10 years. While there are never any guarantees, this should allow time for the investment(s) to recover in case the market drops, and also cover the costs of selling. A study by Yale professor Jeremy Siegel showed that between 1802 and 2012, the worst inflation-adjusted one-year loss in the U.S. stock market for stocks was 38.6 per cent (the best gain was 66.6 per cent), bonds' worst was 21.9 per cent (best, 35.2 per cent) and treasury bills' worst was 15.6 per cent (best, 23.7 per cent).
But the spread changes over five years. The worst five-year return for stocks was 11.9 per cent (best gain, 27.3 per cent), bonds' worst was 10.1 per cent (best, 17.7 per cent) and T-bills' worst was 8.3 per cent (best, 14.9 per cent).
"Stocks, in contrast to bonds or bills, have never delivered a negative real (after-inflation) return over periods lasting 17 years or more," said Siegel.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected]
