Don't be a market timer
Being a millennial and working in the financial services industry, I often receive calls from friends or family asking for investment advice. Ninety-nine percent of the time they are looking for the next big investment or how to time the market. And I understand why – people see articles in the media such as, “if you just invested $10,000 in Amazon’s stock when it IPO’d, then it would be worth more than 12 million today.” Beyond the fact that these articles are useless given the average holding period of a stock is now only 5 ½ months, so the chances that someone holds a stock for this long are almost zero, but these clickbait headlines give people the illusion that these opportunities are easy to find. Well, they are not. In fact, going back to 1926, out of about 26,000 stocks listed in the U.S., only 1,100 companies or only 5% of the total delivered all the return in the US market (above Treasury bills). Of these 1,100, there were actually 50 companies that made up 40% of the entire wealth created in the US stock market over that 90-year period. Needless to stay picking stocks is a tough game.
With regards to timing the market, I receive questions such as: is now a good time to buy? I’ve been hearing the market is at all-time highs – do you think it will drop? How much longer can the S&P 500 continue to put in new all-time highs? Should I go to cash and wait for the market to drop to protect my investments?
I understand people wanting to ask these questions, the media plays with our emotions.
Early on in my career I made the mistake of giving out stock picks that I believed had the potential to do well. Sure, there were some winners – but there also were some losers. Some of those winners, however, took a while to play out and certainlyhad some bumps along the way. What are the odds that you will continue to hold a stock when its down 40% from its high if the ONLY reason why you bought it in the first place was justbecause your friend told you to? Not very likely.
I also made the mistake of “supporting” (without realizing) the notion that the market could be timed. If the market was down 5% off of highs, then I would tell a friend that now is probably a good time to buy, and if the market was at all-time highs, I would say maybe hold off a little longer.
In hindsight I was lucky to have learned these lessons early on in my career. These mistakes allowed me to understand and discover the secret formula to making money while investingtoday which is:
2 X Current Market Price + (3/number of full moons this year) – (1000)
JUST KIDDING!
Here is the real formula: time IN the market
Now, when I receive these common investing questions, I always reiterate and focus on the most important factor to investing: time IN the market vs TIMING the market. Just get in!
So, what is timing the market?
“Market timing” is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. Market-timing investors are essentially trying to “beat the market” by outsmarting it – or so they think.
What does time in the market mean?
“Time in the market” is where an investor does not guess when the market is at its lowest or highest point. Instead, the investor buys the market knowing that their timing is probably going to be off, but that eventually, the fundamentals matter more than the timing.
Let’s take a look at some fun graphs & charts that will show you why investing is about time IN the market instead of timing the market.
Market timing has its cost
When investors get scared and decide to sell and stay out of the market, investors eventually face the difficult question of when to buy back in again, and those who miss the turn – even for a short period – can cause lasting damage to the value of a portfolio, because market rallies often come in surges that are measured in days, not weeks.
Timing the Market is Difficult
The graph above shows that over a 30yr period of investing$100,000 in the S&P500, an investor’s portfolio value is cut inhalf after missing only the 10 best days.
The best days and worst days happen close together
If the best days are missed, investors will need longer period to recoup their losses. The best days in the market tend to be clustered around also the worst days in the market.
Time is your ally
Looking at global stock market data between January 1971 and May 2020, if you had randomly picked one day during this period and chosen to invest just for that one day, you would have had a 52.3% chance of making gains — almost a similar odd to the toss of a coin.
Long-term investing dramatically increases your chances of returns. Just weeks more in the market can make a considerable difference.
If you had invested your money for a quarter, or 65 days, during that same 49-year period, your chances of making a profit increased to 65.09%. Investing for any one year would have generated a positive return 71.83% of the time, while investing for ten years increased your chances to 93.91%.
Interestingly, an investor that invested in the stock market for more than 13 and a half years at any point during this period never lost money (source: https://www.nutmeg.com/nutmegonomics/increasing-your-chances-of-positive-portfolio-returns-the-facts-about-long-term-investing/).
What if you ONLY invested at market peaks?
So, what if you were the world’s worst market timer and only invested the days before a major market meltdown. See the chart below.
Source: https://awealthofcommonsense.com/2020/12/what-if-you-only-invested-at-market-peaks/
There were some tough times in there, especially in the aftermath of the Great Depression. But by and large, the long-term returns even from the height of market peaks look pretty solid and after 20 years you are making money no matter what.
Research that will blow your mind – investing at all-time highs leads to better returns
Setting new highs doesn't necessarily mean the market has peaked and a correction is imminent, just as a pause during a sharp selloff doesn't mean there's not still further to fall.
Also, historical data does not support the idea that investing cash when the market is high is likely to produce lower future returns. In fact, according to J.P. Morgan, over the last ~30yrs (since 1988), investors were better off investing on days that were all time highs vs a day where the market didn't set a new record when looking at 1yr, 3yr and 5yr returns.
“Compound interest is the eighth wonder of the world” ~ Albert Einstein
Being a millennial, many of my close friends are between the ages of 25-35. I continuously stress to them not to worry about which new shiny investment to put their money in or when is the perfect time to buy – JUST INVEST!
The earlier you start, the better off you will be. I think most people understand that the earlier the better, but it is tough for people to fully grasp exactly how much better off you will be.
Time is such a great helper that if you start saving early then your money can even exceed those who save a lot more than you, but start later in life. Just take a look at the chart below from JP Morgan.
Susan, who started investing $5,000/year from age 25-35 (10yrs&$ 50,000 total investment) has significantly more money than Bill who invested 5,000/year from age 35-65 (30yrs & $150,000 total investment). Susan was able to make more money than Bill while investing 100,000 less just because she started earlier in life.
Obviously having $5,000 of disposal income at age 25 is not typical, however, the math works out the same no matter the amount invested. Even if its $500 a year that you can invest, do it!
In conclusion:
People say there are two things guaranteed in life: death and taxes. I’d like to add one more to the list – trying to time the market. However, I’d like to get rid of that third guarantee for future generations. Unfortunately, that will be a tough task. People will continue to hear stories from friends or colleagues about how much money they made trading. They will always tell you their wins, but will rarely – if ever – tell you their losses. A broken clock is still right twice a day.
I hope that after reading this blog, you will think twice about timing the market.
Repeat after me, “I will not time the market, I will not time the market, I will not time the market”.