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Too scared to invest?  You’re not alone.

By Sam Instone - March 16, 2017

 [Estimated time to read: 6 minutes]

The FTSE100 and the S&P500 are continuing their unrelenting rise.

Yet everyone is saying a fall will follow - ‘what goes up must come down’.

Apparently it’s not a case of if, it’s a case of when.

By the time you read this – a fall may have happened already…

Many thought January 2016 was the beginning of the bear…$2.3 trillion went up in smoke when the markets dived. 

Historically, it was the worst 10-day start to a year for investors ever.

But no - markets corrected, readjusted, went back up…which just served to compound investors’ fears.

No one, no one, wants to invest right now – at the top – or near the top - or right before a fall…

Whether an individual like you, like me…

Financial fears

Or a company - whose directors know their fate, their employees’ fate and that of the business ride on them not mistiming the market.

So, if you’re too scared to invest right now, you really are not alone…

Financial fears

What on earth is going on

Legendary investor Howard Marks, who oversees about $100bn in assets, recently commented on the state of the market: “if you’re not confused, you don’t understand what’s going on.”

The Wall Street Journal asked an economic historian to research when the world last experienced a period of negative yields.  You know, like the negative interest rates Switzerland, Sweden, Germany, Japan and Denmark have…

It turns out never – never – in 5,000 years of banking history has this ever happened before.

So just how far from ‘normal’ are we right now?

Considering Toyota issued a three-year bond yielding 0.001% - I’d say ‘pretty far…’ because at this rate you need 69,300 years to double your money!

Confused? Who isn’t!

But are we right to be afraid of investing?  Is saving safer?

5 facts to free you from investment fear

1. The market is efficient

An efficient market is one where the market price is an unbiased estimate of the true value of the investment.

Deviations of market price from true value are random, no group of investors can consistently find under or overvalued stocks using any investment strategy.

Therefore, technically it is never the wrong time to enter the market, because it is always fairly priced.

2. Since 1900, corrections have occurred about once a year every year, but only 20% of corrections have turned into bear markets.

Since 1926, the average bear market run has been 1.3 years, with a cumulative loss of -41%.

In comparison, bull market runs have lasted 8.9 years on average, with a cumulative total return of +490%.

…further evidence that when you invest isn’t necessarily so important…

3. If you just track the efficient market and benefit from compounding by leaving your money well alone, you will, on average, double your money every 7 years (just 7 - not 69,300…)

Between 1985 and 2015 the S&P500 returned an average of 10.28% a year. 

That 30-year period included Black Monday in 1987, the dot.com crash and the 2008 banking crisis.

If you’d invested $50,000 in 1985 and tracked the S&P500 – on good days and bad – thanks to compounding, you could have withdrawn $941,613.61 in 2015.

4. Investing and compounding are your keys to financial freedom.

Saving and compounding are not.

If you save $50,000 today in an instant access account, you may attract an annual interest rate of about 1%...if you’re lucky.

With compounding, it will take you 72 years to double your money (72 – not 7)…of course, not factoring in inflation…

The truth is, if you keep your money in cash, you’re more likely to attract a negative return.

But believe it not, that’s not the most dangerous thing you can do for your money right now…

5. Being out of the market is the most dangerous thing you can do…

  • From 1996 to 2015, the S&P returned an average of 8.2% a year;
  • If you missed the 10 top trading days in those 20 years your returns would have been cut in half;
  • If you’d missed the top 20 days, your returns dropped to 2.1%;
  • And if you missed the top 30? You’d have made nothing…

In that same period, 6 of the 10 best days occurred within 14 of the worst 10 – who could have accurately timed that?

So how much do you risk losing if you get your timing wrong…

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The fear is, if we mistime and dive right in at the highest point of the market, the day before it enters a bear tail-spin, we’ll scupper our financial future forever.

The Schwab Center for Financial Research studied the financial impact of timing in a bid to find out if there was any basis for this universal fear.

They assumed five hypothetical investors had $2,000 to invest once a year, every year for 20 years from 1993 onwards.

The perfect hypothetical investor timed their annual investment at the very lowest point of the market - each year every year – clever!

They returned $87,004 over 20 years on a $40,000 investment.

The worst hypothetical investor timed their annual investment at the very highest point of the market - each year every year – unlucky!

They returned $72,487 over 20 years on a $40,000 investment.

And what of the other three hypothetical approaches?

  • Investing immediately at the same point each year (+$81,650)
  • Dollar cost averaging by drip feeding an investment (+$79,510)
  • Staying in cash…?

The worst performer was the cash investor who, during a time when interest rates were much better than they are today, ended up with just $51,291 on a $40,000 investment.

The value of your courage in the face of fear

“The courage to press on regardless - regardless of whether we face calm seas or rough seas, and especially when the market storms howl around us is the quintessential attribute of the successful investor…” 

- John C Bogle (founder of The Vanguard Group and the creator of the index fund.)

I cannot tell you if or when a market correction is due, no one can.

too scared to invest

But I can tell you this:

  • The S&P500 experienced an average annual dip of 14.2% from 1980 to the end of 2015;
  • Yet in 27 of those 36 years, the S&P500 still achieved a positive overall return;
  • No matter what, 75% of the time, over years that saw 2 Gulf wars, 9/11, Black Monday, the banking crisis, conflicts in Afghanistan and Iraq - markets rose…

Therefore, if you want financial freedom, you have to face your fear of investing

You need to be in the market, stay in the market and ensure you’re following the market.

Focus on what you can control – your costs, your emotions – and leave everything else well alone…because nothing you do will have any impact on the profitability or otherwise of an efficient market. 

Whether the market’s high, low or in freefall – what are the 2 most important things you must do today?

  1. Begin investing, today, in the right way, to stand your best chance of achieving financial freedom sooner (7 years?) rather than later (69,300 years?)
  2. And get professional help – because Dalbar, the financial industry’s leading researcher, identified that whilst the S&P500 returned 10.28% a year from 1985 – 2015, the average investor only made 3.66% a year over that 30 year period.

Someone invested the right way doubled their money every 7 years, but the average investor only managed a doubling every 20.

Maybe that doesn’t sound like much of a difference…

$50,000 invested in the S&P500 in 1985 for 30 years
3.66% annual return Final result = $146,996
10.28% annual return Final result = $941,613


That striking discrepancy of -$794,617 could have been offset with professional, fee-based financial advice, and an index approach to investing.