“Timing is everything” This age-old saying can be applied to so many areas of our lives – including investing. Lately, it seems like timing is on top of a lot of investors’ minds. Questions such as:
All of these are fair and valid questions but if any of us knew even one of these answers with 100% certainty, we would be financially set for life, having mastered the markets years ago.
Timing the market is essentially impossible. So the question is really not if the time is exactly right – but instead if the asset class(es) considered for investment have the highest likelihood of being the best vehicle for the compounding of your wealth for the foreseeable future.
While watching a recent Warren Buffett interview, I heard him articulate this concept perfectly:
“I can’t tell you when to buy stocks, but I can tell you whether to buy stocks”
His point is exceptionally well taken. While one can never be sure if today is the precise right moment and best price to buy stocks, one can do analysis to evaluate which asset class presents the greatest probability of compounding your wealth over time.
So let’s instead look at that question and some factors worth considering in your analysis:
1.) Risk assessment – How do you define risk? Is it the volatility in price? The potential for the price to go down from where you bought it? Or is it permanent loss of capital? Evaluate what you are afraid of – and then assess whether a given asset class presents more of that risk than you can handle – and more importantly, whether you are being paid to assume that risk (see next)
2.) Evaluate alternatives – Assess the risk/return relationship for your available options. In today’s environment, you have cash equivalents providing ~1.5% annual returns, US 10 year bonds providing 3% returns, and the broader US equity market providing an nearly 10% YTD return thru August 31st. Is the incremental return on equities enough to compensate you for the additional risks?
3.) What do you wish to own – Pay attention to what it is you actually own via your investments. Do you want to own productive assets (ie: one with earnings power, cash flows, innovation, employees, ability to return both dividends and profits to you). Or, do you wish to own non-productive assets that are priced solely on a formula or by what others are willing to pay you for them. Equities are shares of productive assets. Bonds, gold, and currencies are examples of non-productive assets
4.) Underlying environment – There is unlimited amounts of economic data one can analyze and assess to determine the status of the underlying environment and economy. While making this assessment, it’s critical to consider whether the environment is supportive of your chosen asset class being able to rise in value. So in the case of equities, does the environment support growth that will drive further sales, ongoing innovation and productivity gains, stable to growing cash flow, etc. In the case of fixed income, are interest rates likely to rise (potentially hurting principal values but allowing coupons to rise) or fall (with opposite effects)? In the case of cash, is inflation likely to erode purchasing power driving real returns negative?
As you can see from the above discussion, timing actually isn’t everything. Instead, time IN (the right place) is what matters.
Invest on – and let time do it’s job,
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