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8. How to always invest your money at the absolute perfect moment

Money Confidence for Young Professionals — Monday Money #8

“ Isn’t the market, like, very bad right now? I keep reading about crashes and inflation and other bad news. Wouldn’t it be better to wait a while in case the market drops further? “

One of the most discussed topics in investing, especially for the beginning investor, is timing.

When to get in? Isn’t right now a bad moment? Or a good one?

The problem with timing is that nobody knows. No one has a crystal ball 🔮 to look into the future and see what the stock market will look like in the future.

If they did, they would get filthy rich and certainly wouldn’t share it with us 😉

So, what can we do about the problem of timing? And the fear of getting into the market at the “wrong” moment?

Keep on reading to find out!

You’re yes, then you’re no… 🎶

The stock market sometimes seems a bit like that Kathy Perry song.

It looks like a person who can’t quite make up their mind.

Down -3% on a bad day, then up 2% on the next.

If you’re not actively following the market, you probably only hear about it at some moments, like when a big crash makes the headlines.

The market constantly going up and down is actually ‘normal’ behaviour and something that investors call volatility.

But let’s not get bogged down with the details.

Let’s have a look at a famous index (= a group of companies) called the S&P 500.

This index tracks the combined stock prices of the U.S.’s 500 ‘largest’ companies on the stock market.

Let’s look at the last 40 years, ignoring the current market downturn, as we’re still in the middle of it and don’t know yet if we’ve reached the end yet.

Over these last years, we’ve seen some pretty nasty crashes, including the Dot-Com bubble of 2000–2002 (-49%) and, of course, the Financial Crisis of 2007–2009 (-56%).

We can also see that, so far, the market has always recovered and gone up (a lot) past previous highs.

Seeing these big crashes scares many investors, and you might be wondering if it isn’t a better idea to wait for the next big crash to start investing.

To answer our question about timing, let’s have a look at three imaginary savers and investors:

Tiffany, Brittany and Sarah

These three girls are all going to do the same thing:

Save and invest $200 a month for 40 years, saving up a total of $96,000 each. In addition, all three will invest in an S&P 500 index fund.

They will buy and never sell for those 40 years. Any dividends they get will be reinvested.

Even though they save and invest the same amount, they have different investment strategies regarding timing and will thus have very different results!

Tiffany puts the money she saves in a savings account where she gets a generous 3% interest.

Then, the day before the big crashes, she invests everything she has into the stock market. So unlucky!

She saved for 8 years before losing 33% very quickly during Black Monday.

She keeps saving and investing at the worst possible moments.

Recently, she invested all her money just before the 2020 COVID crash, resulting in a 34% drop.

Still, because she kept her investments and never sold them, she ended up with $ 764,020 after 40 years.

Not bad, considering she only really saved $96,000 total, and she had the world’s worst timing.

Brittany was the opposite of her friend Tiffany. She also kept her savings in a 3% savings account. But, she predicted the bottom of all crashes perfectly.

She invested all her cash on the day of the lowest point of a crash.

Remember, this is very hard, if not impossible, to do.

If you manage to pull it off, it’s most likely due to luck, not skill.

In 1990, when war broke out in the Middle East, she decided to invest everything when the market ‘only’ dropped 19%.

But when the market dropped 19% in 2007, she didn’t invest yet. Instead, she waited and waited for it to come all the way down to -56%, again perfectly predicting the lowest point.

Brittany was rewarded for her perfect timing: she ended the 40 years with $1,128,332.

Even though this is a significant difference compared to Tiffany’s $764,020, it is ‘only’ 47% more.

The gap, therefore, between the worst and the best timing was only 47% in our example.

Most of their gain comes from buying and holding a low-cost index fund.

‘Slow and Steady’ Sarah doesn’t feel like watching the stock market every day for forty years.

Instead, she opens an account at a broker and sets up automatic investing.

Every month, she invests $200, no matter if the stock market is at a high or a low. As a result, she buys at both the worst and the best moments, and all in between.

Most importantly, she is constantly investing and doesn’t have her cash sitting in a 3% savings account waiting for the ‘perfect’ moment.

After her 40-year investing journey, she ends up with $1,366,329.

Read that again.

She has done much better than Brittany with her perfect timing. About $240,000 better, to be exact.

How’s that possible?!

Because she invested consistently every month (also known as Dollar Cost Averaging or DCA).

While the cash of her friends was sitting in a bank account and gathering dust, her money was growing in the stock market.

We simply cannot ignore the effect of compounding that occurred during that time.

Amount Saved/Invested: $96,000 each

Investment: Buy and hold an S&P 500 index fund

Tiffany (worst timing in the world): $764,020

Brittany (best timing in the world): $1,128,332

Sarah (auto invests monthly): $1,366,329

So, if you’re waiting for the market to drop more, ask yourself if you can time the market as perfectly as Brittany did.

And even if you think you can, be aware that your perfect timing will still get beaten by a DCA strategy of investing the same amount every month.

And don’t forget about the stress of watching the markets closely for 40 years.

Waiting for the perfect moment to buy.

Sarah doesn’t have any of that stress.

She sets it and forgets it. And wakes up to a large amount one day.

Slow and steady wins the race.

Especially for the long-term investor.

It is an often heard mantra in investing:

“ Time IN the market beats timING the market”

​

So. The best time to start?

Today. And then every month again.

What are you waiting for? 😉

— -

Seriously, what is it that you are waiting for?

‍

Cheers,

Jonne

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