Is It Ever A Bad Time To Invest?

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Includes: DIA, QQQ, SPY
by: Neuberger Berman

When the markets seem scary, it's tempting to wait for a "better" time to invest. History suggests this may be a mistake.

Many investors feel nervous about making a commitment to equities, particularly following robust periods of market performance. There are always economic clouds on the horizon, and no one wants to envision their investments taking an immediate loss. But trying to "time the market" by waiting for a more opportune time to invest may be a mistake, as time horizon has often been a significant factor in long-term market results.

We would all time the market if we could do it successfully. Who wouldn't want to avoid major market declines or fully participate in a bull market? The problem is that market timing requires one to make decisions that even professionals find difficult, if not impossible. This is not to say that considering the overall direction of the markets and making tactical tilts aren't without merit. Trying to time one's overall exposure to the equity market, however, brings with it a new set of risks, and may ultimately derail an investor's long-term goals and objectives.

The Pitfalls of Timing

Individual investors are notoriously bad at picking the right times to invest. Fund flows show that investors tend to move in and out of the market at precisely the wrong time - in essence, buying high and selling low. In 2008 and 2009, for example, during the depths of the bear market, investors pulled significant assets out of equity funds. Several years later, they moved back into equity funds just as many equity indexes were approaching or had surpassed old highs (see Figure 1).

Figure 1: Market Timing Travails

Source: Strategic Insight Simfund MF, FactSet. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

In fact, the patterns of overall equity market returns are one of the reasons that market timing is so difficult. Market increases have often come in spurts, and missing some of the market's best days could have a significant impact on returns, as those days have historically accounted for a surprising portion of the market's overall annual returns (see Figure 2).

Figure 2: Impact of Missing Equity Market's Best Days

S&P 500 10 Years Ending October 21, 2015

Source: FactSet. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Over Time, Stocks Have Tended To Go Up

Over extended periods of time, the U.S. stock market has tended to rise in value. Consider Figure 3, which shows that the S&P 500 has risen in 75% of all one-year time periods since reliable market data began (in 1926). Over longer periods, the percentage of positive outcomes has also increased as well - for example, there has been no 15- or 20-year period in the S&P 500's history in which the index has registered a negative return. Figure 4 shows the S&P 500's performance over rolling 10-year periods (that is, the 10-year periods ending in 1935, 1936, 1937 and so on). In only two instances - ending in the depths of the Great Depression and in the midst of the global financial crisis - did the S&P 500 produce negative returns after a 10-year holding period. We believe this underscores the importance of maintaining a long-term perspective.

Figure 3: The Percentage of Positive S&P 500 Outcomes Has Varied by Holding Period

Source: FactSet. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Figure 4: Benefits of Long-Term Investing

S&P 500 10-Year Rolling Returns

Source: FactSet. Data as of October 31, 2015. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Managing Risk Through Diversification

Of course, the case for any given asset class only goes so far. Maintaining diversification is another way to help mitigate the downside risk of an overall portfolio. Investors have often relied on a mix of stocks and investment-grade bonds for this reason. In the current low-yield environment, however, we favor diversification across a broader asset allocation framework that reaches beyond traditional equities and fixed-income to enhance diversification against broad market risk.

Investors today also have access to a broader array of investment options that can provide diversification benefits. For example, once the province of institutions and wealthy individuals, alternative investment strategies are now increasingly available in vehicles without investor qualification restrictions. So-called "liquid alternative" funds are retail mutual funds that pursue alternative investment strategies. Adding alternatives strategies to a portfolio of traditional equity and bond investments can help lower correlations to equity and fixed-income markets. Given the significantly expanded range of alternative strategies available today to a broad audience, adding the potential diversification benefits of non-traditional approaches has become a simpler exercise.

Climbing The Wall Of Worry

Over time, the stock market has managed to navigate periods of economic crisis and geopolitical uncertainty and has overcome significant market pullbacks. Although the global economy continues to expand at a moderate pace, helped by the stimulative efforts of central banks, the proverbial wall of worry stands high today. The Federal Reserve's potential tightening cycle, China's slowing growth trajectory, weak commodity markets and elevated valuations are just a handful of concerns that have investors pondering a move to the sidelines.

The angst investors feel in the current environment is understandable, and behavioral tendencies can be difficult to resist. Working with a financial advisor can provide investors with a long-term perspective and help them make decisions based on goals, objectives and risk tolerance rather than emotion.

This material is provided for informational purposes only. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. The views expressed herein are generally those of Neuberger Berman's Investment Strategy Group (ISG), which analyzes market and economic indicators to develop asset allocation strategies. ISG consists of a team of investment professionals who consult regularly with portfolio managers and investment officers across the firm. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Any views or opinions expressed may not reflect those of the firm as a whole. Third-party economic or market estimates discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates. Certain products and services may not be available in all jurisdictions or to all client types. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns shown reflect reinvestment of any dividends and distributions.

Neuberger Berman LLC is a Registered Investment Advisor and Broker-Dealer. Member FINRA/SIPC. The "Neuberger Berman" name and logo are registered service marks of Neuberger Berman Group LLC.

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