On Thursday, August 15th, 2019, stocks sold off, primarily due to the inversion of the yield curve (explained in a moment). We thought we would approach this from a different angle. In the past, we have addressed volatility, how it works, when it happens, etc. We have recently gotten some questions about whether or not this is the right time to get into the market, so we thought we would tackle this from the perspective of an old adage in investing: it’s time IN the market, not timING the market, that leads to success.
First, as a reminder, typically the longer the time to payment of a bond, the more risk the investor takes and therefore the higher the yield she will demand. So a US treasury note maturing in 10 years should have a higher yield than one maturing in 2 years. That is called the yield curve – the difference between short- and long-term treasuries and it is typically upward sloping (long treasuries are in fact yielding more than short ones). When the yield curve inverts, it means short-term yields are higher than long-term ones. That can only mean that investors have greater uncertainty about short-term economic prospects than long-term ones. Translated, investors have concerns about slowing growth or recession. This is what riled stocks on August 15th.
As far as whether it is a good time to buy stocks, the answer is it depends. If the stock investment is for long-term growth of funds, the answer is always yes. If the stock investment is for making short-term trades, the answer is we don’t know. No one does. There are “Wall Street” investors who get paid millions of dollars a year to make these guesses and the data shows that they typically get it wrong**. As many of you know, we don’t make tactical moves at Metric because we understand the futility of trying to time things that may or may not happen in the future. Witness the graph to the right – this shows the return of the S&P 500 (buy and hold), the return of a 5-year treasury note, and the S&P 500 (but missing the 25 best days in the market) since 1990. As you can see, over the almost 30-year time span, just missing the 25 best days of the market would have given you about the same return as a significantly less volatile investment.
Our point is that trying to time the market is a wasted exercise because it requires knowing something about the future. Instead, we suggest focusing on three things: (1) Asset allocation – know when funds will be needed and ensure that anything needed in 3-5 years is invested in asset classes (bonds or cash) that don’t have as much downside potential as stocks; (2) Watch your fees – this is why we started Metric with lower fees than traditional advisors* and investments with lower expenses than traditional active mutual funds; and (3) Performance – not only do active mutual funds cost more than alternatives like ETFs, the data from Standard & Poors** shows that they also tend to underperform the market over time.
Stocks have long-term returns above other traditional asset classes like bonds and cash as a reward for the ups and downs that come with them. While it can be tempting to sell or hold off on investing when markets are shaky, entry points are difficult to pinpoint and long-term buy and hold is the better approach. As Warren Buffet says, “Be fearful when others are greedy, and greedy when others are fearful.”
Past performance is not an indication of future results. All investing entails risk.