Time in the Market? Time to get Educated!
You'll have done well to not hear about the pandemonium that's been seen in the stock market this year. Countries have shut their doors, major economies have ground to a halt, people are losing their livelihoods: Covid-19 and – perhaps more so – the government responses to the pandemic have us in the midst of an economic collapse not seen since the 1930's. Indeed, some claim what's almost upon us will eclipse the Great Depression!
There has been a recovery of sorts in certain market sectors, arguably thanks to some life support. As of today, the S&P500 has risen by close to 450 points since 23rd March, the day of the deepest valley between the peaks. However, with government stimulus programmes only adding to the already engulfing levels of debt and record levels of unemployment announced across major Western economies, it's widely assumed that this will be fairly short-lived – and, indeed, that the worst is yet to come.
Let's be frank: Covid-19 and the imposed lockdowns across many of the world's major economies are the tip of the iceberg. But what's going to sink the ship? A quick glance at the US Debt Clock gives you an idea of how formidable this iceberg really is: US national debt is at $24.95T and climbing, whereas US GDP is $21.37T – therefore a debt:GDP ratio of 116.74%. Were we to share that debt between every US citizen, each would owe in excess of $75,000. And, more worryingly, unfunded liabilities (i.e., money promised to people without means of paying) have just gone above $147T.
For those of you who reckon we here in the UK aren't in the same trouble, I'm afraid we're not far behind: £2.34T national debt, £37,650 per citizen, albeit with a GDP of £2.27T (88.65% GDP:debt), and around £5.0T in unfunded liabilities from pensions alone.
Of course, a number of mainstream economists, nearly all of whom hail from the school of Keynes, will claim that all this is immaterial; at the end of the day, governments can just continue to print, print and print again to pay off the debt. It's been happening for years, and we still haven't fallen off the cliff, so let's carry on indefinitely. However, before you get carried away, cast your eye over to Zimbabwe and, a more current example, Venezuela; neither ended up bringing forth the Marxist “paradise” they claimed to realise.
So, what does this mean for those of us with pension funds and other investments? Concern. But why? After all, you invest your pension holdings into the stock market, and you give yourself the best returns over time: as published in Triumph of the Optimists, the inflation-adjusted annualised rate of return on equities for the UK investor was more than 5.5% between 1900 and 2017. That smashes the returns for Bonds (less than 2.0%) and currency (not even 1.0%). So, yes, invest in high-performing equities, sit back, and wait for your retirement – easy, isn't it?
Firstly, I'd be eager to point out that this 5.5% doesn't take into account any fees deductible for your investment manager or fund manager, so you could be shaving 2% off this return straight away (of course, you can assume whatever percentage you'd prefer, although a lower charges figure probably means you're invested in lower-performing stocks). For context, £100,000 held for 20 years earning 5.5% each year grows to around £292,000; at 3.5% per annum, that's slashed to £199,000 (all adjusted for inflation).
Secondly, what you actually end up with at retirement is massively subjected to what the market is doing at the time of your retirement. The idea of investing to grow your pension fund is sold to many on the basis of buying and holding for the long-term. “Time in the market”, as the saying goes.
All well and good, you might think, provided the market (or, more specifically, your equities) keeps going up. And, depending on your perspective, this is precisely what the market has done historically: the major indices were pretty much all at record highs prior to the mass run-for-the-hills prompted by the Coronavirus and state-level reactions thereto. However, imagine for a moment that you'd worked solidly for 40 years, contributing to your pension with great discipline, only for your pension provision to be pummelled by a global pandemic two months before your long-anticipated retirement. With no longer enough to retire on, are you just expected to slog out another four or five years at work? As we saw above, the government can't even fund your promised state pension, so what choice do you have?
This is why there is such value in educating yourself and understanding how to take charge of investing your hard-earned money. Active market investors do not just buy and hold – or, hope and pray, better put – for a given term. Contrary to widespread belief, it's possible to make money when the market goes up, down or sideways. The key is knowing how the market works, and how to position yourself accordingly.
No matter what you hear on Working Lunch (or whatever the 2020 equivalent is), irrespective of all the hype parrotted by Fox News, or even what you might have picked up from Economics 101, nobody can predict the future, especially of the market. And, unless you own a fund akin to George Soros's Quantum Group, you can't control the market either. You can, however, control your position in the market, and this goes so far beyond the buy-and-hold approach preached to and adopted by the masses.
An education in the area of investing opens up a number of doors: short-selling stocks, or profiting from volatility by trading options, for example. There's a whole wealth of education material at your fingertips. Forget the get-rich-quick YouTubers and their promises of 1000% returns overnight; there are plenty of genuine educators out there (Andy Tanner's Cashflow Academy a personal favourite) who take you through investing one step at a time. Knowledge and confidence give you control; the more control you have, the lower your risk becomes.
Uncertainty and chaos will always be among us. But, despite this inevitable truth, looking after one's money is ultimately one's own responsibility. As such, you have two choices: sit in financial purgatory, hoping and praying that your retirement will be timed well enough, perhaps paying a small fortune in charges in the process; or invest in your education and learn to thrive in any and all market conditions.
I'll quietly hope that many more people take the latter option.