We often hear from investors that they are worried about how they time the stock market. What if they invest and the next crash or recession is imminent? The potential for loss is uncomfortable. You will always find someone who thinks the stock market is too hot and market prices are ultimately driven by investor sentiment.
We thought we would demonstrate how to perfectly time the market…
Imagine on New Years Eve 2000, you made the resolution to save for the future by putting aside $100 per week. You had two options; put the money in a savings account earning a constant 2% per year or invest in an index fund tracking the NZ stock market. By now, you would have saved exactly $96,000 ($100 per week for the last 18.5 years).
You chose to invest in the index fund and once you invested, you never sold and you always reinvested the dividends.
So now you’ve chosen to invest, how do you decide when to invest? Let’s look at a few different strategies based on when you invested your savings in the market and how that would impact your portfolio balance today.
Every investor wants to avoid market downturns
What if you held your money in a savings account until it was the perfect time to invest. After all, in hindsight there were five periods of greater than 10% “correction” between 2001 and today, shown below between the red and green dots.
If you had perfect timing
If you managed to perfectly time the market and invest your accumulated savings up until each exact low point (the green dots), your portfolio would be $300,083 today.
This means holding your savings in cash from late 2001 until mid 2004 (the second green dot) and then picking the exact lowest market day to invest all you have saved. Repeat this saving and perfect market predicting four times over. Sounds easy right? It can’t be overstated how hard it is to predict the bottom of a market!
If you had spectacularly bad timing
In this instance you do the exact opposite. You invested on the day of the exact market peaks (the red-dots) all of your accumulated savings to date, only for a significant fall to begin the next day. Don’t forget – you don’t panic and sell, you’ve invested for the long term. In this scenario your portfolio would today would be worth $232,137.
Not as good, but almost double the $117,293 you would have if you left the savings in cash.
What if you invested without any thought to timing?
From the 1st January 2001, you started putting your $100 per week to work; automatically investing each week into an index fund. Then you rarely looked at your account again. You continue to consistently invest regardless of the market movements. Today your portfolio would be $301,251. That’s right, the highest balance.
How is that possible?
While many people try to convince you they can predict the future, as the adage goes…
It’s time in the market, not timing the market that gives the best results.
This has been proven numerous times, across multiple markets and time periods. If you’re worried the market is too high and we’re due for a crash or you want to wait for the inevitable drop before you put your money in, instead think about the things you can control.
Why am I investing? When do I need to use this money? Then set up an investment plan that works for you – because your goals can’t wait, but doomsday headlines can.
The numbers don’t lie: attempting to time the stock market is fruitless.
Just get started.