The risks to committing new capital to investments right now may seem abnormally frightening. However, how often is it that we really feel extremely confident that now is a great time to commit new money to an investment? Aren’t there always risks lurking in the shadows? Consider the comments of Neels van Shaik on this topic (via Prieur du Plessis’ blog.)
Commentators and investment pundits have flooded the media with articles and information regarding the state of the world economy and the uncertainty the world faces regarding government debt, geopolitical instability, consumer deleveraging, and the rest of the jargon that goes with it. This is held forward as a key reason why you have to be cautious to commit new capital to the market.
Although all these concerns are valid, you will very seldom, if ever, find a period where global macro forces are in such a state of equilibrium that capital commitments to stocks can be done with any degree of certainty. We can let our minds drift back to the late 1940’s, when Europe was completely broken after World War II and capital was scarce. Looking at the world and the future at that point in time could not have inspired too much hope for investors.
Another example is the seventies which saw one of the worst periods for stock investments. Between 1970 and 1978 the S&P500 delivered a cumulative capital return of 7% and adjusted for inflation a complete annihilation of capital. By the end of 1978 any investor in stocks could have been excused for not having too much optimism on the outlook for stock returns, given the returns over the preceding eight years.
The world has become a very small place and investors and consumers are even more bombarded now with information on financial markets on a daily basis. I am not sure that all this information necessarily adds value to investment decisions though.
Investors must consider the historical pattern of bleak economic environments giving way to periods of economic abundance. Sure, some investments go bust. That is why you don’t put all of your eggs in one basket and why it makes sense to adhere to dynamic approaches that seek to identify and invest in winners and seek to keep losses to manageable levels. Once an investor has given adequate thought to asset allocation and understands the role of each piece of the overall portfolio, it is time to move forward.
Posted by Andy Hyer 
