Is it possible to invest now? How much does it cost to try to guess the moment for investment?

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Market timing is not a good investment strategy, according to an article published by Charles Schwab. Instead, taking consistent action and investing as soon as possible is a better option for most investors. The article compared five hypothetical long-term investors who each invested $2,000 annually in the S&P 500 index for 20 years. The results showed that while the best investor, who invested at the perfect time, earned $151,391, the second-best investor, who invested immediately upon receiving cash, earned just $15,920 less. The worst investor kept their money in short-term treasury bills and earned only $44,438.

Is it possible to invest now? How much does it cost to try to guess the moment for investment?

Are you about to start investing, but the market is at all-time highs and you are afraid to buy at such prices? Are the markets now in a slump, and the world is being predicted to have “another terrible crisis” where stocks will never rise and you are afraid to buy? Maybe you just have some extra money to add to your investment, but are you waiting for the best moment? I bring to your attention a free translation of the article Charles Schwab “Does Market Timing Work?”.

Trying to guess the best times to buy and sell securities is called market timing. Should an ordinary investor engage in market timing and what results can be achieved with its help?

Our research shows that waiting for a better time is much more expensive than simply investing an existing amount. Because choosing the perfect moment to invest is about the same as winning the lottery and the best strategy for most investors is not market timing. The best solution is to create a financial plan and invest as soon as possible.

Five investment styles

But don’t take my word for it. Consider our research on the performance of five hypothetical long-term investors with different investment strategies. They each received $2,000 at the beginning of each year for 20 years until 2020, and invested the money in the S&P500 index (Putting all your money directly into a stock index is not the best strategy, but it is simple and obvious). Let’s find out their results:

  1. Peter the Ideal was a great market timer. He had incredible skill (or luck) and he put his $2,000 on the market every year at rock bottom prices. For example, Peter had $2,000 to invest in early 2001. Instead of sending them to the market immediately, he waited and invested them on September 21, 2001, the low for the S&P 500 that year. In early 2002, Peter received another $2,000. He waited and invested on October 9, 2002, which is the low for the market this year. He continued to make his investments every year until 2020.

  2. Ashley Rishucha used a simple and consistent approach: every year when she received cash, she immediately invested her $2,000 in the market.

  3. Matthew Disciplined divided his annual payments of $2,000 into 12 equal parts, which he invested at the beginning of each month. This strategy is known as cost averaging.

  4. IN Rosie the Unlucky was an incredibly bad time to enter the market – or maybe she was terribly unlucky: she invested $2,000 every year at the peak of the market, following the strict anti-truth of buying cheap. For example, Rosie invested her first $2,000 on January 30, 2001—the most for the S&P 500 that year. In early 2002, she received the second $2,000 and invested it on January 4, 2002 at the top of the market.

  5. Larry Zhdun kept his money in short-term treasury bills (analogue in the CIS – a bank deposit) and did not invest them in shares at all. He was always convinced that lower stock prices and better investment opportunities were just around the corner.

Results: The investment paid off immediately

A person who has never bought stocks invested in 30-day US T-bills. The examples are hypothetical and presented for illustrative purposes only. Dividends and interest are assumed to have been reinvested and the examples do not reflect the impact of taxes, expenses or fees.

Naturally, the best results belonged Peter the Ideal, who waited and invested his money perfectly: he accumulated $ 151,391. But the most stunning results of the study concern Ashley Resolutewhich took second place with $135,471 – just $15,920 less than Peter. This relatively small difference is particularly surprising given that Ashley simply invested her money as soon as she received it, without any attempt to guess the time.

Approach Matthew the Disciplined, based on cost averaging, performed nearly as well, coming in third at $134,856. This did not surprise us. After all, in a typical 12-month period, the market is up 75.6% of the time. Thus, the investment model Ashley subsequently secured her lower purchase prices than the monthly discipline Matthewand, therefore, the final value of the portfolio is higher.

The results Rosie the Unlucky also turned out to be surprisingly encouraging. Although she was $14,300 short of par due to poor timing Ashley (which did not try to choose the time for investment), Rosie still made almost three times as much as if she had not invested in the market at all.

And how about Larry Zhduna, who always caught the best opportunity to buy shares, but did not do it? He turned out to be the worst, receiving only $44,438. He was most concerned about not investing at the high end of the market. Ironically, if he had just invested money immediately without thinking, he would have earned much more over a 20-year period.

The rules don’t change

Regardless of the time period considered, the ratings are surprisingly similar. We analyzed all 76 rolling 20-year periods starting in 1926 (eg 1926–1945, 1927–1946, etc.). In 66 out of 76 periods, the ratings were exactly the same, ie Peter the Ideal was the first Ashley Rishucha – Second, Matthew Disciplined – the third, Rosie Unlucky – the fourth and Larry Zhdun – The last one.

Formation of 20-year rolling periods. There are 76 such periods.

But what about the 10 periods where the results were not as expected? Even in these periods Ashley Rishucha never took the last place. It held its usual second place four times, third place five times, and fourth place just once, from 1962 to 1981, one of the few periods of consistently weak stock markets. Moreover, during this period, the fourth, third and second places were practically equal in terms of final results.

We also considered all possible 30-, 40-, and 50-year time periods beginning in 1926. Except for a few cases when Ashley Rishucha swapped places with Matthew Disciplined, all these time periods followed the same pattern. In each 30-, 40-, and 50-year period, the perfect time came first, followed by immediate investing or value averaging, bad timing, and finally, avoiding investing in stocks.

What could this mean to you?

Plan. Without a plan, an investor turns into a speculator.

The best solution for most of us is to create a plan and start acting on it as soon as possible. It is practically impossible to accurately determine the “bottom” of the market on a regular basis. Therefore, realistically, the best action a long-term investor can take based on our research is to determine what amount of stock market investment meets your goals and risk tolerance, and then consider investing as soon as possible, regardless of current levels market.

If you’re tempted to try to wait for a better time to invest in the stock market, our research shows that the benefits of this approach aren’t all that impressive even for ideal investors. Remember that in 20 years Peter the Ideal received only $15,920 more than an investor who invested his money immediately.

Even an ill-timed investment in the stock market was far better than no investment at all. Our research shows that investors who procrastinate are more likely to miss out on potential upside in the stock market. Constantly waiting for the “right moment”, Larry lost $76,733 compared to even Rosie the Unluckywhich invested in the market at maximum prices every year.

Consider cost averaging as a trade-off

Although, as you know, compromise is not for us…

If you do not have the opportunity or desire to invest the entire lump sum at once, consider investing small amounts regularly. Provided you follow this principle, cost averaging can provide several benefits:

  • Prevents procrastination. Some of us find it very difficult to start investing. We know we should invest, but we never start. Cost averaging helps you invest regularly.

  • Reduces frustration. Even the most level-headed stock trader feels at least a hint of regret when the time for an investment has been poorly chosen. At worst, such regrets can cause you to break your investment discipline in an attempt to compensate for the failure. Cost averaging can help minimize this regret because you’re making several investments, but none of them are particularly large.

  • Avoids trying to guess the best time to enter the market. Cost averaging ensures that you will invest in the stock market regardless of current conditions. While this does not guarantee profit or protect against loss in a falling market, it will remove the temptation to try market timing, which is rarely successful.

As you strive to achieve your financial goals, keep these research findings in mind. It can be tempting to try to wait for the “best time” to invest, especially during a crisis. But before you do that, remember the high cost of waiting. Even the worst market timers in our research were able to outperform those who never invested in the market at all.

Conclusion

  • Given the difficulty of choosing the right time to enter the market, the most realistic strategy for most investors would be immediate investment of money.

  • Procrastination is almost guaranteed to be worse than poor market timing. In the long run, almost always it is better to invest – even in bad timesthan not to invest at all.

  • Cost averaging — a good plan if you tend to regret that large investments may fall in the short term or you like the strategy of investing small amounts as they earn.

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