Bet on long-term market efficiency, not short-term headlines

07 February 2024

While none of us have a crystal ball that can predict the future (unfortunately), we do have history and hindsight. And the lesson from history is that while markets are not always perfectly efficient in the short term, they are in the long term. I’m sure the last year - and especially the last few weeks - has triggered memories of 2008 and the Global Financial Crisis (GFC) in a few of us. In short, the crisis reached its highest when Lehman Brothers collapsed on 15 September 2008, and the following 175 days saw equities tumble (and tumble… and tumble).

A lookback at the GFC:

On 9 March 2009, the S&P 500 hit its absolute bottom of the financial crisis, having fallen almost 50% from its August 2008 peak.

With the benefit of hindsight, I can pinpoint that your best bet would have been to hold onto your cash and then invest in the S&P 500 on 9 March 2009. Because from that day onwards, equities would finally make a U-turn and start climbing again. In fact, if you had invested $500,000 in the S&P 500 on 9 March 2009, you would have approximately $3,349,600 today. That’s a staggering 670% growth in 14 years. Now that would’ve been the perfect strategy to pull off during the GFC.

I have, however, yet to meet anyone who has managed to time the market this accurately.

Hindsight is 20/20

Remember, the media narrative was filled with doom and gloom on what would’ve felt like a daily basis. You would’ve read about major businesses losing millions and billions, evictions and foreclosures on homes, General Motors slashing 47,000 jobs, the UK grappling with unemployment numbers of more than two million, Japan’s economy posting a record deficit of 172.8 billion yen, and the US’ $700 billion Troubled Asset Relief Program.

And in those gruelling 175 days between Lehman Brothers’ collapse and the S&P 500’s lowest point, you would’ve watched the markets plummet. And from that point, it would take yet another 560 days for you to hear the news of the crisis being over.

So the question is, would you have been able to tell that 9 March 2009 was the day that the S&P 500 reached its bottom? Would you have found the courage to go in, especially all in at this moment in time? It is, after all, only in hindsight that we know exactly when the S&P 500 bottomed out and the opportunity that it would present.

And then, equities started coming back to life. Some would have said this would have been the right time to enter the markets again. Others would predict that they’d come down again, and hold out for the next drop, the next “bottom”, the next golden opportunity to time the market.

While it can be tempting to wait for the "next drop" and a “further drop” before entering the market, missing out on growth opportunities can prove costly in the long run.

Enter the easiest strategy to pull off, that yet feels like the hardest thing to do: Investing a fixed amount at regular intervals, regardless of market conditions. Hindsight will show you that those who remained patient and consistent reaped significant rewards over time.

The GFC is not a unique case. There have been several “once-in-a-lifetime” events like the dot.com bubble, GFC, COVID-19 and the Russian invasion of Ukraine. And through it all, markets have remained efficient long term.

While the ideal strategy is possible in hindsight, it’s impossible to achieve in real time. Both the quants and the gurus will tell you the same thing: It's crucial to focus on the long term, hold on and embrace the power of dollar-cost averaging along with the only real free lunch in investing: diversification. When markets are tanking and it seems discouraging to stick to this plan, that’s exactly when it’s the most crucial for you to do so.

By dollar-cost averaging through the good, the bad and the ugly from September 2008 to the end of 2009, your average S&P 500 entry price would have been approximately $963. To give you a more tangible example, if you’d invested $20,000 each month for those 16 months (total deposits $320,000), you would now have $1,737,426.

What the GFC taught us: Stay the course

In the face of uncertainty, the Global Financial Crisis reinforced the importance of staying the course and believing in long-term investing principles. While it's easy to get caught up in the chaos of the moment, embracing strategies like dollar-cost averaging and diversification can empower investors to seize opportunities and secure financial growth for years to come.

The path to success is staying true to your long-term goals, even when the road ahead seems dark and uncertain. Emotions can cloud judgment and lead to impulsive decisions, which is why having a Wealth Advisor who offers objective advice and helps you plan for the future is invaluable.


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