The Right Time to Invest? Right Now
Presented by Joshua Bradburn, CFP?, CWS?
Investors ask me, “When is the right time to invest?” at least four to five times per week. My answer is always the same: “There is no better time than the present.” For someone who does not have the crystal ball of investing, it’s hard to predict the future. The same people who were telling me the market was too high at 14,000 are now the same people telling me the market is too high at 25,000. There is no perfect time, but having an investment strategy should be step one.
To see how waiting to invest can cost you, consider the fortunes of four hypothetical investors, based on data from the Schwab Center for Financial Research.
Each received $2,000 at the start of every year for the 20 years beginning in 1993 and ending in 2012—but as you’ll see, each made different decisions about how to invest those sums.
1. The Perfect Timer. This highly skilled—or very lucky—investor was able to place his $2,000 into the S&P 500 every year at the lowest monthly closing price, thus ensuring the highest possible returns over time.
2. The Early Bird. Each year, this investor kept it simple and invested her $2,000 in the market at the earliest possible moment after she received the money.
3. The Steady Eddie. This investor divided his annual $2,000 allotment into 12 equal portions, which he invested at the beginning of each month—an approach known as dollar cost averaging.
4. The Terrible Timer. This investor, prone to terribly bad luck, consistently “bought high” by investing her $2,000 each year at the market's peak.
5. The Hesitator. This investor ended up never investing in the S&P 500 at all. Instead, he left his money in cash investments (using Treasury bills as a proxy) every year. He always felt that lower stock prices—and, therefore, better opportunities to invest his money—were just around the corner.
The result? Investing immediately can pay off overtime. While the Perfect Timer did best over the course of time, accumulating $87,400 over the 20-year period, the Early Bird investor who put her money to work immediately did almost as well. In the same time, Early Bird accumulated $81,650,or just $5,354 less than the Perfect Timer. Meanwhile, the Steady Eddie who did dollar cost averaging ended up with $79,510 at the end of 20 years, nearly as much as the Early Bird. Even the Terrible Timer came out in good shape, ending up with $72,487.
The lowest performer by far: The Hesitator, who chose to not invest in the S&P 500, wound up with just $51,291—a substantially smaller amount than all the others.
The experiences of these five investors offer some important lessons about investing:
The best time to invest is right now. Don’t get caught up in what the financial markets are doing today or what pundits predict will happen next week. Instead, get in the game and invest right now! The Early Bird’s results show how smart it is to invest as soon as you possibly can, while the Hesitator’s lower results show the costs of dilly dallying.
Even the worst timing beats doing nothing at all. Over the long term it's almost always better to invest in stocks—even at the worst time each year—than to hesitate and not invest at all. Even with her exceptionally poor timing, the Terrible Timer earned around 40 percent more than what she would have if she’d avoided the market entirely.
Don’t worry about trying to time the market. Ultimately, the benefits of timing the market perfectly aren’t all that great. Over the 20 years, The Perfect Timer amassed only around $5,000 more than the Early Bird who put her cash to work right away. What’s more, trying to time the market perfectly is a Herculean task that even most professional investors can’t do successfully over time. Ask yourself: Would you rather stare at stock charts all day or spend your free time with family and friends?
Dollar cost averaging is a great compromise. If you don't have the opportunity, or stomach, to invest a lump sum all at once, consider investing smaller amounts more frequently—just as the Steady Eddie investor did. Dollar cost averaging helps prevent procrastination by helping you stick to an investment schedule. And by ensuring you put relatively small sums of money to work on a regular and consistent basis, dollar cost averaging helps you buy more of your investments when prices are low, and less when prices are high.
Joshua Bradburn, CFP?, CWS? is a financial consultant at the Charles Schwab branch in Santa Monica. He has over eleven years of experience helping clients achieve their financial goals. Follow Josh on Twitter @JoshBradburnCS. Some content provided here has been compiled from previously published articles authored by various parties at Schwab. Charles Schwab & Co., Inc., Member SIPC.
Information presented is for general informational purposes only and is not intended as personalized investment advice. Where specific advice is necessary or appropriate, Charles Schwab recommends consultation with a qualified professional.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Hypothetical $2,000 annual investments in S&P 500 Index. The individual who never bought stocks in the example invested in the lbbotson U.S. 30-day Treasury Bill Index. Past performance is no guarantee of future results. Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly. The examples are hypothetical and provided for illustrative purposes only. They are not intended to represent a specific investment product and investors may not achieve similar results.
Total return figures assume dividends and interest have been reinvested, and the examples do not reflect the effects of taxes, expenses, or fees. Had fees, expenses or taxes been considered, returns would have been substantially lower.
Periodic investment plans (dollar‐cost‐averaging) do not assure a profit and do not protect against loss in declining markets.
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