It rarely feels like the perfect time to invest. If you can get over the hurdle and invest even when it feels like a terrible time, you will be rewarded. History has shown it again and again. For every single period, we can tell you something that the average investor was worried about.
When the economy is doing poorly, the market falls. Yet those declines have turned out to be great times to buy, even when it would have seemed to be the worst. If you wait until things get better, though, you will already have missed out.
The best time to start investing is TODAY. It is not timing that matters; it is TIME.
The performance of five hypothetical investors’ portfolios
Four of these imaginary investors invested $2,000 a year in the S&P 500 index over 20 years, $40,000 total, between 2001 and 2020, while a fifth stayed out of the stock market and invested in U.S. Treasury bills (T bills are government debt obligations issued by the U.S. Department of the Treasury).
- Nicholas Perfect is the perfect market timer. He has an incredible skill (or luck!) and managed to place his $2,000 into the market at the lowest closing point every year through 2020
- Marilena Consistent took a simple, consistent approach. Each year, once he received her cash, she invested her $2,000 in the market on the first trading day of the year.
- John DollarCostAverager divided his annual $2,000 allotment into 12 equal portions, which he invested at the beginning of each month.
- George Unlucky had incredibly poor timing (or just bad luck!). He invested his $2,000 each year at the market’s peak.
- Dimitris Linger left his money in cash investments every year (using Treasury bills as a proxy) and never got around to investing in stocks at all. He was always convinced that lower stock prices and better opportunities to invest his money were just around the corner.
Unsurprisingly, the best results belonged to Nicholas Perfect, who waited and timed his annual investment perfectly (20 years total accumulated amount of $151,391). But the most surprising findings concern Marilena Consistent, who came in second with $135,471, only $15,920 less than Nicholas Perfect. This relatively small difference is shockingly surprising, considering that Marilena had simply put her money to work as soon as she received it each year, without any pretense of market timing.
John DollarCostAverager performed nearly as well as Marilena, earning him third place with $134,856. George Unlucky’s results also proved surprisingly encouraging. While his poor timing left just $14,300 (total accumulated amount of $121,171) short of Marilena (who did not try timing investments), George Unlucky still earned nearly three times what he would have if he had not invested in the market at all. And what of Dimitris Linger, the procrastinator who kept waiting for a better opportunity to buy stocks and then did not buy at all? He fared worst of all, with only $44,438. His biggest worry had been investing at a market high. Ironically, had he done that each year, he would have earned far more over the 20 years.
Timing of your investment matters a lot less than you would expect!
It is nearly impossible to identify market bottoms on a regular basis accurately. We believe the best action you can take is to determine how much exposure to the stock market is appropriate for your goals and risk tolerance and then consider investing as soon as possible, regardless of the stock market’s current level. Procrastination can be worse than bad timing.
Long-term is almost always better to invest in stocks, even at the worst time each year, than not to invest at all. Dollar-cost averaging is a good plan if you are prone to regret after significant investment has a short-term drop or if you like the discipline of investing small amounts as you earn them.