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Investment Success Is More About Participation Than Perfection

Let’s consider a question. I’ll bet you’ve asked yourself this particular question over the past six months or year. As the Dow has climbed through 19,000 and now is hovering close to 22,000, I’m guessing you’ve wondered something like the following: “Should I have more money in the market?”

If you haven’t had this exact thought, perhaps you’ve looked at some of your cash, or some of your bonds as they sit placidly, and questioned: “Maybe I should have put that money into stocks, but now the market is too high, so maybe it’s too late and I’ve missed the boat.”

Herein lies the conundrum of investing. Believe me, I hear it all the time: “Hey, Wes, should I get in now?” Because I know folks don’t want to “time” the market wrong. And it’s a natural thing — no one wants to have “bad timing.” I’ve gotten some iteration of this question a lot lately, and for good reason. The market, despite the pullback, is still within striking distance of an all-time high. And as investors, we often feel like we must have good timing to achieve investment success.

Here’s a newsflash: Investing success is less about perfection and more about participation. Period.

We’re going to dig deep on this one and go through the numbers to illustrate my point. Before we do, I want to tell you just how pervasive the concern about timing is among investors. Just recently, I received a question on this exact point from a radio listener during “Money Matters” (News 95.5 and AM 750 WSB radio). Here’s what the caller said:

“Hey, Wes, the market is near an all-time high, and I’ve been sitting in cash for half of my portfolio. I feel like I missed out and want to get back in at some point. When do I get into stocks? Do I wait until the market drops, then get in?”

It is a question about timing. But remember, as long as you have time (meaning years, not days), the amount of time you are invested handily trumps how you timed your purchase, i.e., when you “got in.”

Of course, this is one of the toughest questions to answer in investing. Naturally, we all want to buy low and sell high. We don’t have a Stargate in our bedrooms, however, to clue us in on what markets will do next week or next month. It’s simply impossible to know.

So what if we strategize to wait for a correction, you may wonder. Even if we do and we get one, it’s widely understood that most investors won’t actually pull the trigger when markets are down. The very fear that led to the correction is what stops investors from buying in when markets swoon.

Our real answer lies in the data that compares what you would get staying perpetually in cash versus getting invested. More specifically, the answer comes to life when we look at the difference in growth between getting in the market (using the S&P 500) at the “perfect” time, and getting in the market at the “worst” time. The data here is clear.

As promised, let’s look at the numbers. These data points illustrate how an investment of $10,000 in the S&P 500 grows over a particular period of time. Each period given is relevant in that the years described were on the precipice of a stock market correction. Of course, it takes time to recover from any downturn, so the data points show what you would have as of 2016 if you had chosen to invest the $10,000 during each unique starting point.

What’s key here? The data gives us the results for “perfect” market timing (meaning when the correction is at its nadir), and the “worst” market timing (meaning right before the market dipped), vs. simply holding your money in cash or CDs. Here’s how the numbers compare for the time periods of a 25-year long run, 17- and 15-year intermediate runs, and eight- and five-year short runs.

  • Long Run — 25 Years — Investing in 1990

The year 1990 saw a four-month bear market.

Investing at the “perfect” time (the bottom of the correction) shows growth to $113,000.

Investing at the “worst” time (right before the correction) shows growth to about $100,000.

Holding cash/CDs would have resulted in $20,000.

  • Intermediate Run — 17 Years — Investing in 1998

In 1998, the market saw another near 20 percent correction.

“Perfect” timing yielded growth to $29,000.

“Worst” timing yielded growth to $25,000.

Cash grew to $14,000.

  • Intermediate Run — 15 Years — Investing during the 2000-2002 period

Oh, yes, we all remember the tech crash. It was massive — the S&P 500 went down more than 49 percent.

Getting in the market with “perfect” timing yielded growth to $30,000.

Getting in with the “worst” timing yielded growth to $18,500.

Cash grew to $13,000.

Here, investing at the “worst” time still bested cash by 42 percent.

  • Short Run — Eight Years — Investing during the 2007-2009 period

Just like the tech crash, the Great Recession/Financial Crisis market period is fresh in our memories.

During this time, “perfect” timing yielded growth to $29,500.

The “worst” timing yielded growth to nearly $16,000.

Cash was practically flat, as interest rates were near zero during this span.

Investing at the “worst” time still beat cash by 54 percent.

  • Short Run — Five Years — Investing in 2011

This time period again saw another near 20 percent correction.

“Perfect” time investing yielded growth to $18,000.

“Worst” time investing yielded growth to $16,500.

Again, cash was practically flat, garnering growth of a mere $13.

This time, the “worst” timing beat cash by 66 percent.

The above data references an infographic that Charles Schwab published in February titled “Is There Ever a ‘Bad’ Time to Invest?”

Understanding this market history helps us to focus in on what really matters in investing: participation, not perfection. In every scenario outlined above, investing at the “worst” time bested holding cash by a long shot.

And this market history reminds us again about the importance of time. And when I say time, I don’t mean 100 years. We’re talking about five, eight or 15 years. Every one of you reading this has that much time. At least we hope that’s the case.

So to answer the question that’s been nagging you, the answer is in the context of participation and time, not in the unrealistic goal of market timing perfection. While we tend to think about investing in terms of what our money may be worth in a year or two, this is the wrong context. The right context is looking out over at least five years. And 10 years? Even better.

 


The original AJC article appears here.

 


 

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