May was a challenging month, and not just because one of my favorite shows, Succession, came to an end. Debt ceiling drama dominated the media as Democrats and Republicans took negotiations down to the wire. Additionally, consumer spending and inflation data came in higher than expected, sparking concerns about whether the Federal Reserve would pause its interest rate hikes at the next meeting. However, despite these obstacles, the market showed resilience, with the S&P 500 ending the month on a positive note, up by 0.4%.

This pattern of overcoming adversity has been consistent throughout the year. We've witnessed multiple bank crises, persistent high inflation, slowing economic growth, and concerns about a potential commercial real estate collapse. Nevertheless, the markets have remained strong, with the broad market posting a 9.0% gain year-to-date. The tech-heavy Nasdaq has been particularly impressive, surging 23.9% due to robust earnings from Nvidia (and others) and the hope that we’re in the early days of an AI revolution.

Yet, despite all this, investors remain cautious and many are staying in cash. ‌But, we get it. With money market funds (or T-bills) now offering 4-5%, why not wait until the dust settles on some of these concerns? Let’s take a look at why this might not be the best strategy.

The hidden cost of waiting

Coming off a bad year in the markets can be tough. Last year, stocks were down close to 20%. To make matters worse, bonds were also down — something that doesn’t typically happen. The situation can prove to be even tougher for investors who’ve just entered the markets back in the post-pandemic boom of 2020 and 2021 — only to be caught off guard by the market's turnaround in 2022. It’s no wonder we still see investors waiting for the environment to get better before putting their dollars to work.

Unfortunately, I’ve come across this story all too often: Investors who reacted after market turmoil, liquidating their investments, and staying on the sidelines for … YEARS. Mainly because it can be so hard to‌ know when the dust has actually settled. Just consider the example above about an investor who pulled out of the markets during the 2007–2008 financial crisis and remained out for only one year. On a $100k investment, that decision cost them close to $300k over the last decade.

Understanding market returns

Now, you could argue that this example was merely a matter of bad timing; that the chosen point in time happened to be the worst period to be out of the market. While that may be true, it misses the larger point. Analyzing market returns over the past 30 years reveals a compelling pattern: Some of the strongest market returns follow the worst years (chart below). The key takeaway is that if you still feel uncertain about the current environment, that's understandable, but don't be deceived into "waiting" for the dust to settle. It could come at a significant cost.

Investors also now face another decision point, one that is relatively new. They can choose to seek refuge in cash, which provides a return. The prevailing thought is: If I can earn 4-5% by holding T-bills or money market funds, why take the risk to‌ earn only 8-11% in stocks? However, this comparison is like apples to oranges. One is the short-term rate available today and the other is a long-term average over decades.

Example: From 1926 to 2022, stock returns averaged 10.1% to 11.8%, but US Treasury bill returns averaged only 3.2%. That means that $1 invested in large cap stocks over this time period would have grown to over $11,500, but if you left that $1 in T-bills, you’d have only $22! 

Of course, from year to year, stock returns will fluctuate much more than T-bills, but over the long term, stocks have historically outperformed T-bills and cash significantly. Long-term averages are just that: averages. It is uncommon for stocks to consistently produce returns within that average range. Instead, they tend to perform either well above or well below that range. Given this, is the opportunity cost of waiting worth it?

Is now the time to invest?

That’s not to say markets will definitely go higher from here; future returns can't be guaranteed. Or, that you should invest all your savings — into the stock market — all at once. It’s to say, if you’re a long-term investor with long-term goals, stay invested, continue investing along the way, and remain diversified. Avoid playing the “waiting game”. 

And while the debt ceiling drama may be mostly behind us, there will inevitably be new risks that capture the headlines going forward.

Hopefully, that doesn’t keep you on the sidelines, waiting for the perfect moment to invest.

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