When is the right time to invest?

My personal opinion is that investors can be braver. It is not about FOMO (Fear Of Missing Out), but about avoiding pitfalls that (wrongly) prevent us to invest our excess cash. Let’s discuss them.

Keeping cash as a replacement for equities

This is mainly a side effect of the 2008 global financial crisis, in which many people got their fingers burnt. In the following, I have summarised common market convictions and will clarify a few misunderstandings.

1 Not buying as long as people are worried
If you wait for not being worried anymore before buying, you will wait forever. Markets are always worried. In fact, it is a positive mechanism as it keeps the euphoria level (which would signal the end of the bull market) in check. Since 2009 (bottom of the market), we have constantly been confronted with challenges (see illustration 1).

The market has overcome each of them. Over the same period of time the S&P500 is up by +450 percent.

Key take-away for savvy investors: It is not the worry of the day which drives the financial markets. Do not overrate them.

2 Paying too much attention to the latest hot topic
These days, everyone seems to be concerned mainly with 3 topics: 1) Inflation running out of control and not coming down, 2) US Federal Reserve being too aggressive at increasing rates, and 3) US recession, or even a global recession.

Everyone is concerned, and everyone discusses the same topics every day. Analysts have already calculated all possible scenarios, meaning that whatever happens next has already been discussed by someone in the public domain. Therefore, all this is already at least partially priced-in.

Key take-away for savvy investors: Markets react to new and/or unexpected information. They don’t react to information which has already been discussed widely.

3 Underestimating that we are always exposed to negative news
It’s a game, and it goes along these lines: Journalists are paid to sell (their news). What sells best? Negative news! Therefore, there is a constant negative bias in the news flow we are confronted with. It is not the case that nothing good happens in the world, but journalists need to sell their stories.

Key take-away for savvy investors: The same can be applied to the economic world. Pay attention to how many ‘financial gurus’ are systematically calling for a major market top or the next crash.

4 Timing the market
Trying to time the market is the ultimate losing game. If it was easy, we would all be millionaires and none of us would work anymore. Corrections are always obvious after-fact only. Nobody knows when they will happen and what will trigger them.

Most investors lack of discipline and will not buy in a phase of market correction. Why? They get scared by the negative narrative justifying why the markets are going down. Remember: journalists are paid to scare you. So you wait for the dust to settle. And once this is the case, the market will have rebounded already (Illustration 2).

Key take-away for savvy investors: Skip the idea of timing the market if you don’t have a crystal ball.

Keeping cash in an inflationary environment

Many investors own cash as they consider it as the best way to preserve their wealth. This is unfortunately wrong when inflation is taken into account: in order to protect their purchasing power, investors need to compensate for inflation, and cash does not allow to reach this goal. Real assets (equities, real estate) are the best inflation hedge. For investors not willing to take such a risk, one can think about the following alternatives:

1. Very defensive reverse convertibles (on equities). Underlyings should be as safe as possible. Indices are better than single stocks.
2. Alternative investments should be considered as a partial fixed income exposure replacement. I refer to hedge funds and the private markets.
3. Low Investment Grade Bonds, now that yields are attractive again.
   Key take-away for savvy investors: Keeping cash – Believing that your capital is protected is a bad idea. We are in an inflationary world, so that we need to think in real terms if we want to protect our purchasing power. Equities and real estate should be our preferred assets in such an environment and, obviously, some more defensive alternatives can be explored depending on each investor’s appetite towards risk.