Timing The Market: Is It A Good Time To Enter The Financial Markets Now?

Talking to our friends and clients, we learned that many have put their investment plans on hold, citing the same concerns: the markets may have bounced back too much, and they should wait to go in at lower levels. We know we shouldn't and we don't like to admit it, it is just too tempting to try and time the market.

In February and March, as markets were falling, many were also reluctant to invest out of fear the markets could fall further. No matter how circumstances and the direction of markets change, the essential drivers of human psychology and behaviour don't.

We are involved about the “what-ifs”, and this often leads us to inaction. We're limited in our ability to execute a good investment because we are either scared to lose money (fear), or because we're feeling that we can buy it at a lower price and achieve greater upside (greed).

It isn't the aim of this article to attempt to definitively answer the issue posed in the title. However, we do need to assess where the financial markets are and also look into why we feel, think and act this way despite our best intentions. We should overcome these fears (and tame our greed) to offer the long-term investment outcomes that are needed to secure our financial future.

Major Global Indices Fluctuations In 2021

Quick Drawdown and Rebound.

What Is happening Right Now?

Let's reflect on what we have just experienced. Who would have thought as we were consoling our clients (including all the employees of Endowus!) and licking the painful wounds of financial losses in the throes from the crisis in March, that in only two and half months, we would have experienced one of the fastest market recoveries in history.

Markets have recouped most of the losses and therefore are up 40%+ from the bottom. All of this happened during a period of massive economic and social dislocation, while global COVID-19 cases were still on the rise.

In fact, as the table above shows, the S&P 500 Index recovered all its losses for the year, while the Nasdaq index and a few other better-performing markets had already made it into positive territory for the year. It is also important to note that the major global fixed income index had recovered its losses earlier since April, working effectively as a natural diversifier.

Hopefully, many investors are in a position where they have recovered a substantial portion of the losses from earlier around. So a common question that our investors ask is, “Where shall we be headed from here?”

Does The Answer Even Matter?

The bear case is apparent – it is characterised by the sentiment – “but situations are still so terrible!” It's the exact same reasons why the markets fell in the first place as it came to grips using the reality of a global pandemic, the far-reaching consequences of the subsequent lockdowns, and its associated economic and social fallouts.

Earnings appeared to be slashed, companies were declaring bankruptcies, everyone was losing jobs in the tens of millions, and people were sick and dying. Because the stock market is a leading indicator, before we had any data that confirmed our worst fears, we had already sold down the market by a lot more than 30% and ranked it as among the worst – albeit one of the shortest – bear markets in history. Uncertainty is the biggest enemy of the stock market, and we have had massive doses of it.

Are we certain about the future outlook from the economy? Maybe not. Valuations are stretched and short-term technicals are extended, so a short-term correction is really a natural concern. If the correction extends itself, the question of whether we will see the previous low or go beyond to new lows will certainly haunt us and our decisions.

We realize that human beings are terrible at forecasting and yet we continue trying. Basing those forecasts on macroeconomic indicators that come out with a significant lag is a loser's game. After all, markets fell dramatically before anyone may even shout recession!

S&P 500 Index Daily Moves Since March

Wild fluctuations from the S&P 500

The problem is that the bull case is equally clear – it's summarised by the sentiment that the worst is over. The rate of daily new infections for Covid-19 have peaked even though we worry about a second wave, every single day is one hopeful day nearer to a vaccine or therapeutic drug development. Unemployment numbers have peaked and earnings have bottomed.

Some tailwinds of lower inflation minimizing prices are everywhere (including in oil prices). It also means household balance sheets are now being shored up by less spending minimizing cost. With the gradual reopening of the economy, it seems that there is finally a light at the end of the tunnel.

Government fiscal support (i.e. cheques in the mail!) is filling what's seen as a temporary demand gap, while central bank liquidity pumping supercharges the markets. All around the world, major central banks have coordinated rapid interest rate cuts and introduced quantitative easing in an unprecedented scale.

We need to understand that financial markets are also driven by demand and supply. Trillions of dollars of money are sitting on the sidelines, with pension funds and retail savers continuing with their investments and regular savings plans. There is no new supply to the market – whether it is IPOs, rights issuance or forced sellers, although a recovering market will entice a few issuers.

These may be some structural reasons for a rising market, driven by an abundance of liquidity and an aging population that finds fewer and fewer alternative opportunities to generate the yields needed to secure their future.

Furthermore, markets are as explained, a leading indicator; the bulls would reason that the bad news is priced-in and unless we see things we have never seen before, we won't be surprised.

Vanguard Continues Their 14th Year Winning Streak Against Competitors

And the large winners are- regular saving retail investors!

Regardless of where the markets head from here, there's a group of investors who have recently been touted as the big winners of 2021 through the media – it has been retail investors, like a group, who have won out. This may be because they did not panic and sell into the correction unlike institutional investors, who collectively dumped stocks. Whether these individual investors were shell-shocked into inaction or were familiar with buying the dips and just continued buying into falling markets, they clearly made the right call.

It is encouraging that most individual investors remain committed to their long-term retirement accounts and also continue putting money into regular saving plans and pension plans. This led to a net inflow in passive investment products. Vanguard Group, which saw the biggest inflows in the US for all index mutual funds and ETFs, become the biggest beneficiary. The largest asset manager in the world is Blackrock, but in the retail mutual fund and ETF market in the US, Vanguard rules supreme. This is not new – Vanguard has seen more net inflows than Blackrock every year since 2007.

While the above chart ends in 2021, Vanguard saw the biggest net inflows in 2021 and again within the first quarter of 2021. On the current trend, Vanguard is projected to overtake Blackrock as the largest asset manager globally inside the decade. Our partnership with Vanguard implies that CPF members have an option to invest passively in globally diversified portfolios exclusively through Endowus.

By utilizing a passive low-cost investing strategy and exercising the power of dollar-cost averaging (DCA), individual investors who stayed the program, especially those that stuck to their long-term financial investment plan, came out because the big winners.

Market Timing: Must i Invest A Lump Sum Or Dollar-Cost Average Over Time?

One of the most frequent questions we receive from clients is whether or not to invest a lump sum or to spread out the investment over a period of time through dollar-cost averaging. There is no simple answer as it depends on your age, your future income (whether there's more money to be invested to DCA in the future), your risk appetite, neglect the goals and future liabilities.

Historical and empirical evidence on DCA have suggested that the longer you spread out your investment funds, the poorer your returns are relative to lump sum investing. If you consider the way the stock market trends upwards over the long run, then it's easy to understand that as time passes, you miss out on the compounding returns of stock markets.

Obviously, you will find exceptions as nothing is always so simple, otherwise the gurus would have penned foolproof strategies on market timing. For example, investing in a lump sum at the beginning of 2021 would have lost out to dollar-cost averaging.

However, the jury continues to be out on the full-year returns for 2021. It's also a very short period that we are looking at and if we look further to the beginning of 2021, then the chart below clearly shows that lump sum would have resulted in a better outcome.

Outcomes Of Dollar-Cost Averaging VS Lump Sum Investment In 2021~2021

DCA vs Lump sum investment during market volatility

The above chart shows 6 scenarios for S&P 500 monthly returns Jan 2021~May 2021.

1. Lump sum of $100,000 deposited from Jan 2021
2. $50,000 lump sum payment + $10,000 monthly for 5 months from Jan 2021
3. Monthly $10,000 deposit for 10 months from Jan 2021
4. Lump amount of $100,000 deposited in Jan 2021
5. Lump sum of $50,000 + $10,000 for 5 months fully invested by end May 2021
6. Monthly $10,000 deposit for five months to May 2021 + $50,000 of cash added back

The reason why DCA and a regular savings plan are critical in our investment plan is that they align with our monthly income cycle. Putting aside a certain portion of our income on a regular basis and investing it in markets allows us to to curb our natural instinct to test our hand on market timing. The bite-sized investments lower the hurdle of putting our money to operate and removes barriers to inaction. It's an antidote to our behavioral problems.

As we make our way through another potential duration of heightened volatility caused by higher levels of uncertainty, I hope that empirical evidence and historical precedence have taught all of us some valuable lessons within our investing journey – particularly that time in markets is more important than timing the market.

Having a financial plan that is ideal for you and your goals and sticking to it, even and especially through periods of uncertainty and volatility. Its smart to be fully invested and to remain invested in the markets, especially if you have more income in the future.

Remember it's more about managing risk than maximising returns that will give you the peace of mind you need to help make your money work for you, so that you can live easier today, and tomorrow.

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