INDUSTRY INSIGHT
YOUR FINANCES
SPONSORED CONTENT
It’s Time
to
Invest!
HINDSIGHT…
RETROSPECT…
20/20 VISION…
MONDAY MORNING
QUARTERBACKING...
When you have money to invest, don’t you wish you knew when
would be the best time?
Looking back, 2017, for example, would have been a great time to
invest, with the Dow setting 76 record breaking highs. Right?
Right, but just for the sake of argument, let’s go back to January
2017. The market outlook was okay but not great. The long-running
market rally in U.S. stocks was in its 8th year – one of the longest-
lasting market rallies in history and long overdue for a correction. In
January 2017, you could have made a good case for not investing in
the stock market. The law of averages did not appear to be in your
favor. If you had cash to invest on January 1, 2017 and did NOT invest
or if you pulled out of the market in anticipation of a pullback, you
would have missed a banner year.
Meanwhile, the S&P 500 was up 21.7% in 2017 - just another
example of why market timing doesn’t work.
Fast forward to now, the fundamentals look good, but again, the
market is still at a relative high point, and the average price-earnings
ratio is currently 25.99—a bit pricey (the average P/E ratio of the
market is about 14). Maybe you could have invested a few weeks
earlier when a market correction was being defined as a 10% drop
from its most recent peak. But you would have had to be watching
closely, and no one realized that over half of that pullback would be
recovered in the following weeks. With the Dow dropping over 1000
points in a single day, who would have known it wouldn’t go down
further?
Fact is: there’s never a bad time to invest as long as you have a
well-diversified portfolio and do not have “all your eggs in one
basket.”
In 1720, Sir Isaac Newton—arguably one of the smartest men who
ever lived, lost 20,000 British pounds by investing in the South Sea
Company stock at the top of the market. The oversold South Sea
Company was founded in 1711. The common expression, “financial
bubble,” found its origin in this investment. When the bubble burst,
thousands declared themselves ruined and banks failed because they
could not collect loans used to purchase the inflated stock. It wasn’t
long before investigations into the scheme began. Newton actually
sold his first investment for 7,000 pounds in April of 1720 with a
100% return. With the confidence gained from that transaction, he
re-entered the market and ended up losing 20,000 pounds several
months later.
They knew about diversification in the 1700s, but unfortunately for
Sir Isaac, the idea wasn’t perfected until 1952 when Harry Markowitz
wrote a paper entitled “Portfolio Selection”. Four decades later (in
1990) Markowitz was awarded the Nobel prize for his work.
In the past, diversification meant increasing the possibility of a loss
or accepting a lower expected return (an either or possibility). On
the other hand, the Markowitz theory on diversification in the 20th
century was something entirely new, a finely tuned strategy defying
the tradeoff that exists between two extreme possibilities.
By diversifying an allocation using a mix of invested assets with
negative correlations to each other, an investor could afford to
increase the allocation to higher returning assets with lower risk
in the overall portfolio. Markowitz believed that an investor could
accomplish 90% of their financial objectives simply by positioning
their assets within these certain asset classes.
Thus, asset allocation and diversification based upon modern
portfolio theory reduces the angst of when to invest or knowing
how to time the market. In a well-balanced portfolio based on your
financial goals and time horizons, it makes little difference whether
you invest at a high point or a low point in the market. There are no
guarantees, of course, but we know as Isaac Newton learned that
market timing doesn’t work. If you would like to learn more about
asset allocation and diversification in investing, give us a call at
H Financial for a confidential meeting.
This Industry Insight was written by Garrett S. Hoge.
Garrett S. Hoge, CFP®, ChFC®, MS of H Financial Management,
is a private wealth manager based in Southpointe
serving the ever-changing financial needs of his clients.
Please contact Garrett at H Financial Management,
400 Southpointe Blvd., #420, Canonsburg, PA 15317,
Phone: 724.745.9406, Email: [email protected], or via the
Web: www.hfinancialmanagement.com.
Securities offered through Triad Advisors, LLC, Member
FINRA/SIPC • Advisory Services offered through H Financial
Management.
H Financial Management is not affiliated with Triad Advisors,
LLC.
PETERS TOWNSHIP
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APRIL/MAY 2018
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