Dear Financial Voice Reader,
If you’re like a lot of my Great Investments Programme students you have some cash to invest and are worried inflation will eat away at its buying power.
Investing in the stock market now
The S&P 500 is up 4-fold in the past decade.
A common mistake investors make is believing that they missed the boat on investing, that it's just too late to enter the stock market. The S&P 500 has risen 4x in the past decade and along with it, many of today's largest and most recognizable companies have attained unprecedented valuations. Who would have thought so many companies would be worth over a trillion dollars. How many zeros is that?
The world turns quickly these days and when you look at some of the newcomers from a year or two ago like Beyond Meat or Bumble, they’re huge failures and other successes did not even exist a couple of decades ago.
Do you have extra money lying around?
Do you have extra money lying around?
If the answer is yes, then I'll show you how to get a better return on it than if you bought gold, held cash, or even invested in bonds.
It’s easy to think that investing money is only for the wealthy and well-versed in finance. But the truth is that anyone can do it. All you have to do is invest in an S&P 500 index fund and let time work its magic.
If you invested $10,000 in an S&P 500 index fund 10 years ago, your investment would be worth $40,000 right now (before taxes). And in an ISA there are no taxes. Or in a SIPP. That's a lot more than you'd get from keeping your money under a mattress!
There are good reasons to be cautious.
Two things should be clear by now. First, the stock market is volatile. Its price today will almost certainly not be its price tomorrow. And second, recessions are inevitable. The economy is a cyclical beast, and it may go south again at any moment.
So why invest in the stock market at all?
While it's true that recessions are always a possibility and that their effects can be devastating, it's also true that the stock market can fall—and recover—many times in between major crises. Indeed, that's what's been happening for decades now. The S&P500 is up 10x since 1995. Butt bewarned, it produced 0% from 1998 to 2010. In other words, it does not rise in a straight line. And I don’t know if it is about to give another 12 years of 0% returns – but I doubt it.
If history repeats itself, we should buy all the S&P 500 we can right now
“The P/E ratio is a classic measure of any security's value, indicating how many years of profits (at the current rate) it takes to recoup an investment in the stock. The current S&P500 10-year P/E Ratio is 34.1. This is 70% above the modern-era market average of 19.6, putting the current P/E 1.8 standard deviations above the modern-era average. This suggests that the market is Overvalued.” Says website Current Market Valuation. Historically, stocks do not return much during a recession (and sometimes bear markets). From its peak on September 1st, 1929 until its trough on June 1st, 1932 the Dow Jones Industrial Average declined by 89%. From November 1973 to October 1974 – it declined 46%. Then from March 2000 until October 2002 – it declined by 49%. It would be reasonable to expect that if we have another recession within two years (which is what people are expecting), stocks might decline by 50-60% over several years.
Alpesh Patel
