The stock market is on a tear.
As the Dow has soared through 20,000 and 22,000 and now past 24,000, you have considered (repeatedly) whether you should have more money in the market. But let me guess: Your next thought is, “Nah, the market is too high. After all, we’re supposed to buy low and sell high, right?”
Here’s the flaw in that seemingly logical thought train. It puts way too much emphasis on the timing of when you enter the market. While nobody wants to jump into stocks only to catch a hideous down draft, investing success is less about when you get in the game, and more about how long you play.
Let me go through the numbers from a study released this year from Charles Schwab to explain why timing perfection is less important than participation.
Take a look at what $10,000 grows to over various lengths of time. In each period, or main block of time, $10,000 is put to work right before a large market correction, then given time (25, 17, 15, 8 and 5 years) then re-run for each block of time (25, 17, 15, 8 and 5 yrs.)
We are analyzing relatively short or intermediate time periods (8 and 5 years) and some more lengthy periods (15, 17, and 25 years) and comparing how much money $10,000 would grow to time with perfect timing, versus the worst possible timing.
Most importantly, we also compare all these results to the alternative of having money stashed in cash or CDs.
So, what does $10,000 turn into over different time periods (A-E).
A. Starting in 1990. This first one is a 25-year study – 1990 until 2016. $10k invested with the worst timing possible (just before the 4-month bear market in 1990) grew to almost $100,000. If you got in at the bottom of the 1990 correction, you would have $113,000. That’s not a tremendous difference and both were hugely better than the results of keeping your money in cash or CDs, where $10,000 turned only into $20,000.
B. What about starting in 1998, either right before a 20% correction or perfectly at the bottom of the almost 20% correction? This one runs for 17 years – 1998 until 2016. The worst timing: $25,000, best timing $29,000. Cash, $14,000.
C. How about jumping in right before the tech crash in 2000? This is a 15-year time period. It started out disastrously. The S&P 500 down 49%. But even with the worst timing, $10,000 still turned into $18,000, the best timing $30,000, cash just $12,000. See that? The worst timing still beat holding cash by 42%.
D. Imagine investing right before the Great Recession/Financial Crisis ‘ this one is an 8-year timeframe: Best timing $29,000, worst timing $16,000, cash practically flat (as interest rates were near zero during this span). So even bad timing out-performed cash by 54%.
E. Let look at the 5 years beginning in 2011 pre-or post a near 20% correction. Perfect timing turned $10,000 into $18,000, terrible timing netted you $16,500. With cash, you made $13 bucks on $10k. In this case bad timing still bested cash by 66%.
Understanding this market history helps us focus in on what really matters in investing ‘ lengthy participation, not perfect timing. A carefully crafted stock portfolio is like a bonsai tree. Given careful tending and plenty of time it can flourish.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.