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When You Invest May Not Be As Important As You Think When You Invest May Not Be As Important As You Think
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It's Not When to Invest in the Market, It's Whether to Invest in the Market

Insights & Ideas Team •  May 10, 2016 | Your Finances

Feel like you’ve been on an investment roller coaster lately? It’s not your imagination. In the past eight months, we’ve seen both the Dow Jones Industrial Average and the S&P 500 swing more than 10 percent on four different occasions.1 And the ups and downs have taken their toll on investor emotions.

“On some level, people understand that volatility is the price of admission in order to have a chance at higher returns,” said Will Richardson, Northwestern Mutual wealth management advisor. “But even some of my most knowledgeable clients have gotten nervous lately and are asking, ‘Have I made a mistake? Am I investing at the wrong time?’”

You might be feeling that way, too, especially if you happened to invest in the market right before the two most recent downward swings—in August of 2015 and the beginning of 2016. But, Richardson says, take heart. “If you’re still in the market and your investments are diversified, you haven’t made a mistake.” To prove his point—and to help ease his clients’ anxiety—Richardson put his ‘stay the course’ advice to a mathematical test.

He and his team looked at 30 years of market history and identified the three worst possible days you could have made an investment—days right before the market took a nosedive—and then asked: Where would you be today if you had invested $100,000 on each of those three days? “I thought if I could show the math behind the worst-case scenarios, I could help people feel better.”

Here’s what they found:

Scenario #1: Black Monday, October 19, 1987. On this day in history, the S&P 500 dropped 20 percent in one day, the most extreme single-day movement in the market in the last 30 years. If you invested $100,000 in the S&P the day before, on October 18, your investment would have been worth just $80,000 the next day. A year later, however, you’d have been back on track; and if you stuck with it, the calculations show you’d have ended up in great shape. “At the end of 2015, you’d have $1.3 million, which means you would have ended up earning an internal rate of return of 9.5 percent over 28 years,” he said. “This shows that even if you get it fantastically wrong, you still came out ahead over time.”

Scenario #2: October 9, 2007, just weeks before the recession of 2007 officially began. “For those of us who were born after the Great Depression, this was arguably the worst financial crisis that’s happened in our lifetimes,” said Richardson. “So this is an example we can all relate to.” The bottom line? If you invested $100,000 in the S&P 500 that day, you’d have taken a pretty significant immediate hit but would have been back in the black just five years later. And at the end of 2015, you’d have $156,211. “That’s an internal rate of return of 5.57 percent, which—given where interest rates have been lately—is better than what you might have earned anywhere else.”

Investing for You: 5 Critical Questions for a Smart StrategyScenario #3: March 10, 2000, just before the tech bubble burst. To test an even more extreme circumstance, Richardson calculated what would have happened if you had invested $100,000 on this day in 2000 in the NASDAQ, which—unlike the diversified Dow Jones and S&P—is made up solely of technology stocks. “That’s not something we would ever advocate because investing in a single sector opens you up to too much risk,” he said. “But what we found shows that even the least diversified, worst possible idea ended up on the plus side just 15 years later.” Their analysis showed that a $100,000 investment in 2000 would have been worth just $28,000 two years later, but today it would be valued at $106,000.

It’s important to note that each of these three scenarios assumes that the investments were left untouched and you would have had other assets, like a bank savings account or the cash value in permanent life insurance,1 to draw from if you needed money during down market cycles. That’s also why it’s important to have a financial plan that considers the worst-case scenarios and builds in the flexibility you’ll need to avoid having to sell investments when the markets are down.

In the end, Richardson says the exercise reinforced what he’s always known (and what his clients know but sometimes forget)—that when you have a diversified portfolio of investments, the market can be a great place to be over the long term, no matter when you get in. “We have to view market volatility in the context of history, which means that how we feel in the moment isn’t all that important,” he said. “I make the analogy that if I’m in an airplane and there’s turbulence, I might feel scared because it’s bumpy and I don’t know why it’s happening. But in the context of the whole flight, it’s pretty uneventful. I got from where I was to where I was going, and it was all just fine.”

Utilizing the cash values through policy loans, surrenders of dividend values or cash withdrawals will or could reduce the death benefit, necessitate greater outlay than anticipated or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC).

All investments carry some level of risk. including the potential loss of principal invested. No investment strategy can guarantee a profit or protect against loss.  Past performance is no guarantee of future performance. Indices are unmanaged and cannot be invested in directly.

Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market.

Standard and Poor’s 500 Index® (S&P 500®) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

The Nasdaq is A global electronic marketplace for buying and selling securities, as well as the benchmark index for U.S. technology stocks.


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