To say that this has been a frustrating year probably understates the current state of the market. A $100,000 investment in the S&P 500 at the beginning of the year is worth $75,180 today. That’s a loss of 24.82% with dividends reinvested. The irony is that this frustration can double up when the market inevitably recovers; investors usually bemoan the fact that they didn’t invest more when the market was down. The incremental dollar invested now can help you get back to your 2022 starting point sooner.
Doing nothing vs investing more
A hypothetical $100,000 investment made at the beginning of the year, now worth $75,180, needs a 33% return to get back to break even. But if we can invest an additional $5,000 now, we’d need a 31% return to get back to our new principal amount of $105,000. The more we can invest now, when the market is down, the less we need the market to rebound to get back to breakeven. (Click chart for interactive version):We can further visualize this concept by showing how quickly our investment will recover based on a range of outcomes over the next five years. If, for example, the market returns 5% for the next five years, our investment will be worth $95,950. That’s still $4,000 short of our original $100,000 investment.
Waiting five years to still be underwater on our investment is a pretty sobering thought. But if we can invest an additional $15,000 now while the market is down, and still earn that same 5% annualized return, our account value will be back to breakeven after five years.
How do you make more meaningful headway in shifting these numbers? You can either invest greater amounts now or hope that the market offers higher rates of return. (Click chart for interactive version):What if you don’t have new money to invest?
We’re not suggesting that (a) it’s easy to invest more when you’ve lost so much this year or (b) that money grows on trees and you can readily just pile it into the market. However, for the investor who is sitting on extra cash the market may be presenting you with an opportunity here. Or, if your returns are less bad than the broader markets, then now may be a good time to increase your exposure to equities.
This could entail selling a bond fund, which is probably down 10-15% on the year, to buy an equity fund, which is down 25%. Even gold, much maligned for being an ineffective inflation hedge this year, is down significantly less than equities on the year. If you have 4% of your portfolio in gold, consider reducing that to 3% and raising your equity allocation by 1%. Point being, there are different ways to add money to equities right now that doesn’t necessarily involve adding new money from your savings or cash flow.
We understand much of the frustration investors are feeling right now. But if the market recovers faster than anticipated, you may be doubly frustrated that you didn’t take advantage of current opportunities.
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