Staying grounded with your investments
In March, NASA called off the spacewalk with International Space Station (ISS) crew members Christina Koch and Anne McClain. The decision was very unfortunate, as it would have been the first all-female spacewalk in history – after more than 200 ISS missions since 19981. But what's even more astonishing is the reason for cancelling it. After doing a test run with the spacesuit, the two female astronauts realized they needed a medium-sized spacesuit…but there was only one medium-sized space suit ready on the ISS.
Space missions are very complex and require a high level of skill, discipline and attention to detail. Yet it's possible to overlook a detail that might seem insignificant, like the sizes of spacesuits on hand. This incident reminds us of the importance of getting back to basics and paying attention to details, a notion that’s equally important for investors.
Many active traders try to outsmart the stock market by watching from the sidelines. To determine the ideal time to buy, they rely on obscure technical indicators, sophisticated analysis tools and financial gurus. But like NASA, they forget some of the basics. Here are two of them:
The stock market trends upward over the long term. Between 1980 and 2017, the S&P 500’s average annualized return was +10.3%2.
Stock prices rarely see severe declines. Since 1965, the S&P/TSX has dropped 25% or more on just seven occasions3.
That’s why dollar-cost averaging is a good option to consider. By automatically investing the same amount of money on a regular basis in a diversified portfolio, you increase your chances of success.
If you think this approach is too simplistic, here’s a scenario put forward by stock market blogger Nick Maggiulli4.
Imagine you went back in time between 1920 and 1979 and you had to invest in the U.S. stock market for the next 40 years.
You have two options:
Dollar-cost averaging: Invest $100 (inflation-adjusted) in the S&P 500 every month the whole time.
Buy the Dip: Set aside $100 (inflation-adjusted) every month and only invest your money in the S&P 500 when it dips to an absolute low point between two all-time highs.
In both cases, you can’t sell any stocks after purchasing them.
Which strategy would you choose?
It’s tempting to buy only when the market dips, but dollar-cost averaging produces better results 70% of the time. And knowing that the market trends upward over the long term and that severe declines are rare, it makes sense to place your bets on probability and invest on a regular basis. So if you want your portfolio to take off, stay grounded and don't forget the basics!
1Agence France-Presse, 2019
2J.P. Morgan Asset Management, 2018
3CI Investments, 2015
4Maggiulli, 2019
Sources:
Agence France-Presse, "La NASA défend l’annulation de la sortie 100 % féminine dans l’espace," TVA Nouvelles, accessed April 2019, This link will open in a new tab. https://www.tvanouvelles.ca/2019/03/27/la-nasa-defend-lannulation-de-la-sortie-100-feminine-dans-lespace-1.
CI Investments website, "Five strategies for dealing with difficult markets," published 2015, This link will open in a new tab. http://www.ci.com/orderform/pdf/general_marketing/5strategies_difficult_markets_e.pdf.
J.P. Morgan Asset Management website, "Guide to the Markets. Market Insights," 2018, This link will open in a new tab. https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/market-insights.
Nick Maggiulli, "Even God Couldn’t Beat Dollar-Cost Averaging," Of Dollars and Data (blog), May 18, 2018, This link will open in a new tab. https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-cost-averaging/.