Recently, I decided to google the question “Where should I hide my money?” The question is especially relevant given the confusion over where to put your money right now. You’d be surprised (as I was) to find advertisements for everything from socks with secret compartments, to hollowed-out deodorant bottles. The question you should explore before you purchase that next bottle of Brut is, why you feel the need to hide your money. The answer, of course, is that there is a risk of loss. No one wants to lose money. Yet, we as investors experience the fear of loss at the wrong times. In fact, now is the exact time you should be investing in the equity markets.
On average, investors who entered the market at or near a peak earned around 3 percent over the 36 months following the trough. In contrast, investors who entered the market at a trough earned around 28 percent over the following 36 months. The odds, at least historically, are in favor of the investor that started to invest at the bottom, not at the top. The problem with entering the market near the bottom is emotional, not statistical. It should come as no surprise that the last seven times the market declined more than 17 percent, the average market return was positive over the next three years. Yet, after a market loss like the one just experienced, a client predictably argues that it is different this time and that their fear is currently justified. When the markets reach new highs, the investor confidently buys more. Much like a herd, investors will pour into equities near the tops and out near the bottom. The question you should ask yourself is “Will this time around be any different?”
The perfect situation for any buyer occurs when prices are depressed, but with a prospect for appreciation. Buying low is quite rational – just ask Warren Buffet. The emotions attached to purchasing near the lows however, might seem quite irrational. To some extent, our feelings are wrapped with more complexity. It is more than the possibility of loss; it is also the loss of control we feel when we allow others to suggest ideas that may not have “worked” as recently as last October.
So, if you are still asking, where you should hide to avoid the market loss, the answer is found in the market’s role in your investment plan. It’s not the same purpose it plays for CitiGroup, the New York Stock Exchange Chairman, nor Treasury Secretary Paulson. The market exists so that your money can work for you so you don’t have to always work for it. Now is the time to consider investing.
A market decline is much more common than you think. During any given year, there are dozens of declines. The magnitude of the current decline has not been seen for a number of years. This current environment is cultivating negative investor emotions and reinforcements that are consistent with a market trough, not a peak. Historically, investors are compensated for going against the herd at a time like this. A consistent theme in successful investing has always been this: buy low, sell high.
Robbie Cannon is president and CEO of Horizon Investments.