March 2020

Why Investing At The Top Makes Sense

The sharp drop in global equity markets has investors on edge and wondering if they should move to cash in case markets drop further. History has shown that this is a poor strategy for a long-term investor – it’s far better to stick with a well-diversified portfolio than to try to time the exit and entry points into gyrating markets. What works is to maintain an investment discipline over time, an approach that works even if you begin investing at the worst time possible, at market top.

Let’s say you are the unluckiest investor in the world. You come into money and decide to invest in a well-diversified portfolio (2% cash, 22% bonds, 51% global equities, 25% credit/hybrid). However, you unknowingly do so at the absolutely worst times possible in the last sixty years, meaning immediately prior to the onset of the nine worst markets in that period (including Black Monday, the dot-com implosion, and the 2008 Global Financial Crisis).

Well, you’d undoubtedly feel terribly unlucky in the near term and would question your strategy (and perhaps your sanity!). But what if you did nothing, letting your investments ride for the next five years?

The results are startling: in all nine periods your portfolio made money despite its poor start, with an average gain of 32% over the five-year period. The average drawdown was 14% (not pleasant but hardly disastrous) and it took an average of only 6.4 months from peak drawdown to regain all the initial losses.

Diversified portfolio during crisis 202003

Just doing nothing (other than rebalancing monthly) led to perfectly acceptable returns in every worst-case starting scenario. Sure, returns could have been better if you’d had the foresight to sell before the drop and buy at the bottom. However, the ability to time markets has proven to be virtually impossible for even the most astute investor, particularly when this would require the ability to accurately do so twice: first to know when to sell, and second to know when to buy back in.

The implications of this are clear:

  • Investors are overly concerned with market drawdowns that inevitably happen over time.
  • Sticking to a well-structured investment discipline works, even (or particularly) in difficult times.
  • It’s more important in the long run to be invested than to try to time when to be invested.

If volatility isn’t the enemy of the long-term investor, what is? The permanent loss of capital due to the realization of losses. While that’s an entire subject in itself, here are the primary causes of permanent losses and ways to avoid them from occurring:

  • Insufficient Liquidity. Lack of the liquidity needed to fund lifestyle and other obligations can create the need for forced assets sales during down markets. Hold sufficient liquidity to get you thru 12-18 months of needs.
  • Bad Investments. This can be caused by a lack of due diligence, impulsive behavior, or relying on poor counsel. Ensure that you have a qualified advisor and limit your exposure to any single strategy or manager.
  • Overpaying for assets. Ensure that you’re paying a fair price for the expected return of an asset and rebalance your portfolio regularly.


Tiedemann Advisors (Tiedemann) is an investment advisor. Information given herein is believed to be reliable, but Tiedemann does not warrant its completeness or accuracy. Economic and market forecasts and opinions and estimates constitute our judgment and are subject to change without notice. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Any references to indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. Past performance is no guarantee of future results. Investors should consult with their financial advisors before investing in any investments. This is for information purposes only and is not a solicitation to buy or sell any specific investment.

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