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As always, great stuff from Charlie Bilello.  This question comes up constantly, and usually includes comments like “the market is too high”, “valuations are extreme”, “a recession is coming”, “waiting for a deep pullback”, etc.  It all comes down to timing the market which many investors believe they can do but nearly zero can do it successfully.  Sitting in cash definitely comes with an opportunity cost.  

From Charlie:

  • If you are waiting for lower prices to get in, chances are you will get them (74% of the time), but you also have to be prepared to wait forever (26% of the time there’s no lower low).
  • Timing the market based on valuation is not an easy task, and you have to be prepared to sit in cash for many years or even decades depending on your methodology. Had such a strategy been applied historically, it would have lagged buy-and-hold because equities with high valuations can still have positive (and cash-beating) returns over time.
  • Predicting recessions with precision on both ends is nearly impossible, and even if you could’ve done so historically, there’s no guarantee you would have earned a higher return (since the Depression ended in 1933, you would have actually earned a lower return than buy-and-hold even if you were able to predict the exact start and end date of the next 13 recessions).
  • If you are waiting for a bear market (-20%) or more to get in at lower prices, you may never get that chance (only happens 21% of the time).

More here:  A Guide to Moving from Cash to Investments – Compound Advisors