The stock market seems to set a new all-time high every day. While this is great news for people that are already heavily invested, it can be intimidating for people who want to get started, but are scared of “buying at the peak.” This post will take a look at the perils of trying to time the market and offer a few thoughts on beginning to invest in this environment.
Before I get started, I want to give a shout out to everyone who has listened to my 2cents since I started this little blog last summer, invested accordingly, and are wealthier because of it!
Don’t try to time the market – you will lose
While perusing the internet, I came across a really interesting fact: over time, most of the gains in the stock market come from 1-2% of all trading days. What does that mean for you? If you’re standing on the sidelines waiting for the proverbial “Perfect Moment” to start putting your money to work, chances are you will be waiting forever!
If that was a little confusing, consider the chart below. The chart looks at how much money you would have made if you would have invested $100,000 into a fund that tracked the S&P 500. The interesting part is how much LESS you would have earned if you missed the best 5, 10, 15, 20, 25 days during that time period, in this case, from 1992-2011.
In short, if you had the stomach to just stay invested, you would have made 4 times the amount of someone who missed the best 25 days over the last 20 years. Given that fact, what makes you think you can tell when the time is right to buy a particular stock or fund? Chances are you can’t. Human emotion (in my humble opinion) works against long-term success in the market.
So what should I do now?
I’m not encouraging everyone to put all their money into the market tomorrow, but I’m here to tell you that it’s still not too late. One thing I tell my friends and family is that you have no choice, but to be invested. Unless you have a small business you plan on starting or want to try your hand at real estate, what are your other options? Putting money into a savings account won’t get you anywhere, if your goal is to build wealth, eventually retire, or send your kids to college.
While I’ve already showed you a breakdown of what my portfolio looks like in the hugely popular “How to Become a Millionaire without Having a Big Time Job” post, I’ve included it below.
While most of these funds have had sizeable increases as of late, that doesn’t mean that long term they won’t rise significantly higher. In fact, THEY BETTER if any of us expect to retire! Additionally, emerging market and international funds (for example) have not shared the same success as US-based stocks since there is still considerable uncertainty in those regions (look at what is going on right now in the tiny island nation of Cyprus). There are still bargains out there, they just require a little digging.
I’m still worried
Worrying is normal. As I always say, the time that you’ll want to invest the least, is often the time when you should be investing the most. Confidence is returning to the economy and stock prices have reflected that sentiment. As Warren Buffett is fond of saying, “It is better to buy a great business at a fair price, than a fair business at a great price.” If you’re reading this post thinking, “I’ll wait until the Dow Jones goes down a little before investing,” then what would you do if the market shot up even more? You would likely sit there and be mad. And if the market went down? You’d likely sit there and say, “I told ya so,” but still wouldn’t invest!
Regular retail investors (like me and you) largely missed out on the doubling of the stock market because we were scared and waited for things to appear safe again before jumping back in. The trick to investing is to dollar cost average. I’ve mentioned this before, but it means to put the same amount of money into the same stock or fund(s) at regular intervals (i.e. monthly, quarterly, annually, etc). This enables you to buy more shares when the market is down and fewer when the market is up. This is the same thing that you’re likely already doing in your 401k, and frees you from trying to time when to get in and out of the market.
What do you guys think?
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