The Worst Market Timer
With the market near all-time highs, investors are often weary of investing, wanting to wait until there is a sell-off. It is a very rational thought, especially when the economy is hurting like it is now.
When it comes to investing cash, the question you should ask is “When will I need it?” not “Is this a good time?” In my opinion, if the money is not going to be needed for 10+ years, you should invest the funds. If you can’t stomach doing it all at once, develop a specific plan to get into the market. For example, if you have $80,000, invest $10,000/quarter over the next 2 years. Once you do invest, staying invested is key.
Inspired by a post by financial blogger Ben Carlson, I wanted to show you the power of staying invested. Let me introduce you to my fictional friend Jerry – he might be the worst market timer in history.
1. In 1970 he graduated college and started saving $3,000/year. He had always been skeptical of the stock market so he stashed it in a savings account. Then in September of 1987, with $51,000 in savings, he finally gained the courage to invest it all in the market (S&P 500) …right before “Black Monday.” He saw his investment lose 1/3 of its value in a matter of months.
2. This experienced frightened him again so he then started saving his $3,000/year in cash from 1988 until 1999, a total of $33,000. Then after over a decade of being out of the market and seeing the market go up and up, he invested all of it right before the tech crash in September 2000, where the market lost nearly 50%.
3. Traumatized by the experience, he went back to investing in cash, saving his $3,000/year from 2000 until 2007. Then one last time, he invested all $21,000 right before the financial crisis in October 2007, when the market lost over 50%.
In 2007 he stopped saving and in November of 2020 he retired. Retire? How? You might be tempted to think that this ended in complete financial ruin. That is farthest from the truth. While he saved new money in cash until buying at every market peak, he left the original investments untouched.
His original investments totaled only $105,000 but as of the end of November 2020, he would have over $1,100,000[1] as he prepares for retirement – not so bad!
As you’ve heard me say before, it’s time in the market, not timing the market, that leads to financial success. Jerry had terrible timing, but was in the market for over three decades. Of course, he could have done much better if he had invested each paycheck, but he’s going to be alright.
I suggest that you find an investment plan you are comfortable with, which includes knowing the downside risks. Automate your savings and investment decisions or outsource those decisions to someone you trust.
Despite whether you invest at the perfect time or perfectly wrong time, losses are an inevitable part of investing – you can’t control that. You can only control what you do after the losses.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.
1.“S&P 500 Periodic Reinvestment Calculator, With Dividends.” DQYDJ, 27 Nov. 2020, dqydj.com/sp-500-periodic-reinvestment-calculator-dividends/.