Martin Pelletier: While historically markets have gone up over longer stretches, strategic investing is warranted during volatile times
There is a great saying about investing: it isn’t about timing the market but rather time in the market that matters. This principle generally holds true, as history has shown that the probability of a loss decreases considerably the longer one stays invested. However, there have been periods where equity markets have struggled to deliver attractive returns, highlighting the fact that timing can still play a role.
For example, the S&P 500 experienced zero or negative annual returns from 2000 to 2010, a period infamously known as “The Lost Decade.” Similarly, from about 1972 to 1982, high inflation and rising interest rates created an environment of stagflation, suppressing returns. Going further back, the Great Depression (1929 to 1939) also resulted in a prolonged period of weak market performance.
One commonly recommended approach to mitigate these risks is dollar-cost averaging (DCA), where investors consistently invest a fixed amount over time, such as making monthly contributions. This strategy has proven to be a highly effective way to build wealth over the long run, smoothing out the market’s ups and downs and reducing the impact of volatility.
Fidelity Investments’s Jurrien Timmer conducted an insightful analysis on the effectiveness of DCA. He examined the results of investing $100 into the U.S. stock market every month over 10-year periods, using data dating back to 1926. The results showed that in 90 per cent of cases, the outcome was positive, with an inflation-adjusted compounded annual growth rate (CAGR) of 3.5 per cent.
However, the timing of when one began a DCA strategy had a significant impact on results.
Investors who started in the 1940s were rewarded with double-digit returns, whereas those who began in the mid-1960s or in 1999 faced negative returns. For those who believe a 10-year period is too short to assess the strategy’s effectiveness, Timmer extended his analysis to 20-year periods. The probability of positive returns improved to 96 per cent, with an average CAGR increasing to four per cent. The best CAGR over this period was 9.1 per cent, while the worst return was -0.7 per cent. As Timmer noted, “while the worst loss was minimal, it does show that equities have not always kept up with inflation, even if held for 20 years.”
This is why we at TriVest Wealth Counsel prefer investments that offer asymmetrical payoff profiles; those that provide downside protection while capturing upside potential. Having downside protection is especially crucial for investors who have already accumulated wealth and wish to avoid the volatility associated with equity markets. For younger investors employing a DCA strategy, we suggest adjusting the approach by increasing investments after significant market corrections and diversifying more when valuations are high. This can involve adding fixed income, gold, commodities, or other asset classes to balance exposure.
Tactical asset allocation strategies can be particularly beneficial in achieving this balance. Fortunately, some exchange-traded funds (ETFs) and mutual funds offer these types of services, providing investors with an active approach to portfolio management.
We think such an approach may be especially useful in today’s market environment, where structural shifts could be unfolding. With U.S. President Donald Trump taking office, uncertainties surrounding tariffs, U.S. isolationist policies, reshoring, and rising global debt levels — including within the U.S. — could all impact future long-term market returns.
The last thing an investor needs is rising inflation coupled with moderating returns, leading to flat or negative real returns over extended periods. Furthermore, the increasing concentration of technology stocks in passive portfolios poses additional risks, especially after a decade of strong equity market performance. In light of these challenges, a more strategic and diversified investment approach may be necessary to navigate the evolving market landscape effectively.
