But does it make sense to invest in stocks now, she asks?
I explained that I couldn’t advise on buying specific stocks, preferring the kind of index fund she already owns. These funds eliminate the risk of owning the wrong specific stocks at the wrong time. Since 1976, when John C. Bogle used index funds extensively at Vanguard in 1976, index funds that track broad markets have provided ordinary investors with an easy and inexpensive way to capture the overall returns of the financial markets.
But with stocks falling broadly since the start of the year and bonds falling as well, that may not seem like much to say. Despite occasional rallies, the S&P 500 is down nearly 18% this year. Bonds also lost money. My personal portfolio, which includes bonds and stocks, has lost about 13%.
Ouch! I’m not happy about that.
But I admit that I cannot predict the short-term movement of the market.
Then again, no one can do this consistently. Despite all the written and spoken words on the subject, they do not amount to true knowledge.
Lessons from Financial History
“Where is the market going tomorrow? We don’t know,” Savina Rizova, head of research at Dimension Fund Advisors, the asset manager, said in an interview Tuesday.
Dimensional doesn’t try to make short-term bets, she said. Still, she said, finance does hint at what the market might be able to do in 10 or 20 years or more.
“We know from history that stocks have higher expected returns than Treasury bills or cash,” she said. Because day-to-day returns are unpredictable, if you try to get in and out of the market at the perfect time, you’re likely to miss some of the market’s biggest days. They can happen at any time, even in long down cycles.
Dimension January 1, 1990, looking at the S&P 500 through December 2020. Discover these returns that investing $1,000 in index yields:
$20,451 (if you are fully invested) the entire period.
At $18,329, if you missed the best single day in 31 years, the October 13, 2008 gain was 11.6%.
$12,917 if you miss the best five days.
$7,080 if you miss the best 15 days.
$4,376 if you miss the best 25 days.
Ms Rizova said that based on the numbers, it would make sense to put money into the stock market as soon as possible. “You can miss a big day, and if you miss those, you miss out on a lot of benefits,” she said.