Common investing mistake that could cost $172,000

Most investors are extremely tempted to make this move during times of turbulence but it’s a very costly error.

Is now a good time to buy shares?

Off the back of the Silicon Valley Bank (SVB) collapse, we saw over $US1 trillion ($A1.5 trillion) wiped off the value of the sharemarket in less than a month. Investors are nervous, governments are nervous, and the fear cycle has gone into overdrive.

In the current climate, I’m seeing more and more people talking about the potential for a full market meltdown and some are even talking about the end of the financial system as we know it. In the opposite corner, we’re hearing from some that markets today are giving us the best investing conditions seen in decades.

So who should you listen to? And is investing today a dumb move, or a genius one?

What’s going on?

This disruption all started with the collapse of SVB shortly followed by Signature Bank, which sent shockwaves through the global banking sector and resulted in a number of other banks coming under pressure. Investors started panicking, and that panic caused a wide scale sell off on the sharemarket.

This all sounds like a bad thing, and clearly investments going down in value is never good, but there were some positives that came from this – the main one being the impact on the forecasts of interest rates and the potential for recession in the US and around the world.

Following the SVB collapse, within three days we’ve seen the most reliable indicator of a potential recession (US two year treasury yields) reduce by 58 per cent, and interest rate predictions have been significantly reduced.

Silicon Valley Bank spectacularly collapsed. Picture: Rebecca Noble/AFP

The market is now expecting the US Central Bank to reduce interest rates by 0.5 per cent this year, that rates will be 1.5 per cent lower by the end of 2023, and that the ‘peak interest rate’ will be 1 per cent lower than expected just a few weeks ago.

This shows how quickly financial markets can change. And while these changes to expectations have come from an undesirable event, the impact is positive for investors.

What does it mean for investors?

Investing today is scary. There are a heap of people talking about the potential for things to get worse before they get better. There are some that are talking about a complete bloodbath in markets and the potential for a massive crash.

But it’s worth noting here that in all but the most severe of predictions, there are going to be a heap of quality investment opportunities over the next 12 months. And if the worst of the predictions are right – it means there will be even more opportunities.

Consider this example, and I have to give full credit for this one to investment powerhouse pearler who put out these figures.

If you’d invested $10,000 into the 500 largest US companies 30 (S&P500) 30 years ago, that money would be worth around $208,000 today, reflecting a total return of 1980 per cent.

But here’s the thing – if you weren’t invested during the downturns and missed the best days in the markets over that time, your $10,000 would only be worth $36,000 today – meaning your investments would have grown by $172,000 less.

Only investing when the market is good can be a costly mistake. Picture: iStock

And the kicker here is that over 83 per cent of the ‘best’ days in markets happened during bear markets when the sharemarket was in decline.

This shows how difficult and costly it is to try to ‘time’ the market, choosing not to invest when the market seems risky. The lesson here is that consistent investing, even in periods where markets seem wild, pays off.

In my opinion, we’re at the beginning of what could be a golden period for wealth building. And the reality is that as an investor, you only get so many of these golden years. The 2020 Covid crash was one of those periods, as was the 2015 Euro debt crisis, and the 2008-09 GFC was the first one I saw in my investing career.

These periods are times where investors had a huge opportunity to accelerate their wealth building and come through disruption in a much stronger position. Some investors bunkered down, caught up with all the fear and noise, and did the financial version of treading water.

Others took the time to plan out a smart approach, and took action. This group came through the disruption stronger. With any short term opportunity, you need to take advantage while it lasts.

At the moment I’m seeing a lot of people fearful, thinking the least risky thing they can do is to save money in cash or park it in an offset account.

What these investors don’t realise is that doing nothing is risky at the best of times, but in periods like we’re seeing today, doing nothing is extra risky – and could be seriously costly.

What can you do?

That being said, investing without a clear strategy or plan isn’t a good move at the best of times, but investing without the right plan today is borderline crazy.

There are a heap of quality, once in a generation investment opportunities out there today, and most likely more coming up over the year ahead. But what happens in the short term is anyone’s guess, and market conditions absolutely could get worse before they get better.

What that means is that you shouldn’t invest any money you need to access in the shorter term. This way, even if investment markets continue trending down in the short term, you won’t be forced to sell your investments at a loss.

Don’t invest money if you need to access it in the shorter term.

While seeing your investments go down is never a comfortable thing, you should rest assured this is actually an opportunity to invest more at an even bigger discount – that will then pay off even more when markets eventually recover.

If you’re not an experienced investor, or even if you are, take the time to put together a solid strategy before you jump in and invest. That way you’ll have confidence your risks are well managed, and you can then have peace of mind and confidence that comes with knowing you’re playing the long game.

Given the size of the opportunity and the potential to seriously set up your future from the investing moves you make today, putting yourself in a position to take confident action will be valuable. If you’re struggling to do this on your own, consider getting some quality professional help to help get you started.

The wrap

The collapse of Silicon Valley banks has sent ripples throughout the financial world, and fear levels are high – but that doesn’t mean you should bury your head in the sand waiting for the world to end.

We’re coming into one of the golden years for investors. Some people will struggle to keep up, but those that make the smartest moves today will come out the other side in a stronger position than they’re in today.

Which group will you be in?

Ben Nash is a financial adviser, founder of Pivot Wealth creator of the Smart Money Accelerator program.

Ben is also the Author of Replace your salary by Investing, host of the Mo Money podcast and runs regular free online money education events – book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.