Here’s What Happens When You Invest at Market Peaks

PT Barnum is often credited with coining the phrase, “there’s a sucker born every minute.” History buffs argue the famed circus founder instead stated, “there’s a customer born every minute.” When it comes to investing, the words “sucker” and “customer” could be interchangeable.

As human beings we are drawn to the idea of the future being predictable. And anyone that, for one second, purports to be able to have some insight into what the future hold, we’re hooked – yet as clear as day, we all know these folk hold no insight whatsoever.

It’s tough to make predictions, especially about the future.

– Yogi Berra

Financial markets are no exception. We want to avoid the tops and pick the bottom, we want to avoid paying top dollar, and pursue bargain basement prices. Yet when we find ourselves in the midst of euphoria or a crisis, we tend to follow the crown.

Try to be fearful when others are greedy, and greedy when others are fearful.

– Warren Buffett

What if you just had shear bad luck when investing? What if you weren’t able to avoid the tops? Even worse, you retired precisely when the market peaked?

Ben Carlson of A Wealth of Common Sense ran these numbers for a US based investor, so I decided to run the numbers for an Australian based investor. We’ve got three investors, James, Frank, and Steve. They each retire just before the stock market peaks with AU$1,000,000 invested 70% in the Australian share market (S&P/ASX All Ordinaries Index – Total Return), and 30% in Australian bonds (Bloomberg AusBond Bank Bill Index). They also draw 4% of their portfolio at the beginning of each year to help fund their retirement. I’ve also assumed the portfolio is rebalanced once a year, and I haven’t taken into account fees or taxes to keep things simple.

Here’s what I found:

  • James retired on October 1987,
  • Frank retired on June 1998, and
  • Steve retired on September 2007.

Here are the returns adjusting for inflation:

Trying to time the market for it to add any benefit to your investment returns is super difficult. Investing at market tops prior to retirement hasn’t been as destructive as one would have assumed – although it could be. The analysis shows a somewhat diversified portfolio that is structured, disciplined by rebalancing, and an investor’s who remains patient without getting in and out of the market, their portfolio can remain quite robust through their retirement. Of course, the longer one invests for, the better the financial outcome – who would have thought.

The best time to invest is when you have the money.

– John Templeton