If you are worried about adverse market timing, then divide your investment dollars into three or four slices and implement multiple purchases through weeks or months. This mitigates the chance of investing all your cash near a market peak. It also reduces the pressure of guessing the perfect day to buy stocks. Only two outcomes can happen: Stocks go up, and you feel good about investing that first chunk. Or stocks go down, and you buy more at a better price.
Think for a moment about what would happen if you invested in stocks at the worst-possible time: immediately before precipitous declines. What events come to mind? Black Monday (October 1987). The Dot-Com Bubble (March 2000). The COVID-19 pandemic (February 2020).
Dollars invested into the S&P 500 in 1987 (before Black Monday) have returned roughly 11% per year since then. Money invested in early 2000 around the peak of the dot-com bubble has returned around 8% per year. Cash invested immediately before the COVID-19 panic has earned almost 15% per year. In all cases, the long-term returns have still been impressive.
Just because the S&P 500 is near all-time highs doesn’t mean every company in the benchmark is as well. Remember the largest seven companies, which comprise 35% of the benchmark, skew S&P performance. There are plenty of stocks trading well below their high-water marks. We prefer targeting individual stocks with high earnings growth but lower debt levels and less expensive valuations than the S&P. That allows us to hunt for value even when the major benchmarks are so elevated.
Here’s what Warren Buffett said about holding cash: “People who hold cash feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”
The depreciation Buffett refers to comes from inflation. One dollar invested 30 years ago into the S&P 500 would be worth nearly $20 today. Adjusted for inflation, the same $1 left in cash for 30 years would be worth 47 cents. Hold only enough cash in your portfolio to provide peace of mind and invest the rest.