by Adam Netland

You’ve worked hard for your life savings, and you’re counting on it to be there to provide for your lifestyle and security through your retirement. It’s reasonable to understand how your investments can be an emotional subject.

When investing in stocks, one of the greatest fears is “what if I buy the top?” The fear is that as soon as you get invested, the market goes down (for awhile). But really, what is a market top, and further, what is a market bottom? The greater the time span that you measure market performance, the more you realize that all these supposed tops and bottoms are only temporary. If you look at a chart over a 10, 20, or even 50 year time horizon, you realize that these fleeting tops and bottoms are really just a number of peaks and valleys (troughs).

Since this article is about confronting a common fear, nothing will be “sugar-coated.” We’ll actually take a worst-case scenario of the markets. Below is a table of the last 13 fluctuations in the market from each peak to trough. The index used for the stock market in this example is the S&P 500 Index.

Note: Past performance is no guarantee of future results

As you can see, since 1950 we’ve had 13 major market corrections, and we are in the middle of the 13th as this is written. We’ve recovered from all of these corrections within an average of 2 years, 7 months to get back to the previous highs (peaks). Over time, higher peaks and higher troughs are produced.

Since few of us started investing in the 1950’s, let’s create another “worst-case” scenario. From 1980 – 2002, what if you invested $1,000 into the stock market at each of the 6 peaks or “tops” of the market just before each of the corrections? If you would have stayed invested, as of October 13, 2008 your portfolio would have still grown to $20,152. So $6,000 invested over the last 28 years at market peaks would still have grown to $20,152. Not bad for being a terrible market timer! The key, though, is staying invested. That’s why we at Wealth Enhancement Group stress the principle, “It’s time in the market, not market timing.”

On the flipside, from 1980 – 2002, if you would have invested $1000 each at each of the 6 market troughs or “bottoms,” your investments as of October 13, 2008 would be $26,800. So, hypothetically, investing in troughs can be more beneficial over the long-term. Like Warren Buffet says, “try to be fearful when others are greedy and greedy only when others are fearful.” The key to all of these examples is maintaining your investments in the market.

Unfortunately, stock market experts seldom agree on the market’s direction in the short-term, and barely ever get these temporary market tops and bottoms correct. In what can be emotional times, it’s important to always keep in mind that for the long-term investor, stock market highs and lows are really just passing peaks and troughs. Once again, it’s time in the markets, not timing, that really counts.

Adam Netland
Sr. Asset Manager
Wealth Enhancement Advisory Services
Investment Management Department

Source: S&P 500, Wealth Enhancement Advisory Services, LPL Financial Research Past performance is no guarantee of future results