Is the Market Too High? Part 2

Is the Market Too High? Part 2

by Bo Billeaud on September 23, 2016 Uncategorized

Continuing with the theme of our last blog, another comment we have recently heard from prospective clients goes something like this –”I’d hate to get started, only to have stocks take a serious fall right at the outset (which, by the way, completely ignores the fact that a diversified portfolio is not fully exposed to stocks). Maybe I should wait for the stock market to fall and then begin. What do you think?”

Well, while no one knows exactly what may lie ahead, a review of the evidence (again) sheds a bit of light on this subject.

Recently, I came across a piece of interesting research. Michael Batnick, director of research for Ritholtz Wealth Management, published the following data concerning market declines. He looked at daily closes for the market, every day since 1926. He wanted to see how many times, on a year-over-year basis, the market moved by more than 20%, in either direction, up or down.

Answer: 394 times. Interestingly, of those 394 one-year twenty percent moves since 1926, 336 were positive and only 58 were negative. In other words, historically, U.S. stocks were nearly six times more likely to be up twenty percent one year later than they were to be down twenty percent.

You can see his results visually in the chart below (lots of green, not much red).

So, for those waiting for the next major decline before starting an investment program, you are likely leaving a lot of opportunity on the table. Not once, but six times for every downturn. This data seems to very much corroborate Peter Lynch’s observation;

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”.