Timing the market vs. time in the market: why the best time to invest is now
If investing your hard-earned money in the market makes you a little nervous, you’re not alone.
From economic and political events to ‘meme’ stocks that often affect short-term market performance, investing in the market can seem like a bit of a roller coaster ride. But time and time again, history has proven that staying invested for the long term in a well-balanced and diversified portfolio will serve you well. Some investors will try to time the market to maximize returns. And new investors may be wondering, “when is the right time to start?” The truth is, market timing doesn’t work, and now is a good time to start investing.
What is timing the market?
You’ve probably heard the saying “buy low, sell high”, and this is essentially the strategy behind timing the market. Investors try to time the purchase or sale of their investments to maximize returns. For example, if an investor read a headline in the news that they believed would cause a downturn in the market, or even just in a particular stock, they may choose to sell shares of their equity investments to protect a gain or prevent or minimize a loss.
The problem with timing the market.
It’s extremely difficult to time the market correctly and consistently. So, unless you have a crystal ball or plan to leave the education field to make this your full-time job, we wouldn’t suggest timing the market as an investment strategy. (And even if you made this your full-time job, when you think about it, if timing the market did work, a lot more people would do it!)
The issue with timing the market is when you try to predict the best time to buy and sell, you may miss days when the market makes the biggest gains. The highest gains or biggest losses can occur quickly and sometimes unexpectedly. For example, the highest gains often happen during or soon after a correction, and missing these days and the gains that come with them could potentially cut the average returns of an investment portfolio in half over time. For a recent example, three of the best days for stocks in the past 30 years occurred in March and April of 2020, during the height of the COVID-19 pandemic.
The cost of missed opportunities.
The following shows the returns you would have received from investing $10,000 in the S&P 500 over 15 years from December 31, 2007, to December 31, 2022. It also shows that if you stayed fully invested, you would have earned $19,215 more than an investor who missed just the best 10 days. And the more best days missed, the lower the returns.
Returns from staying invested vs. missing the best days in the market |
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| Investment scenario: | Balance would be: | Return would be: |
| Stayed invested for 15 years | $35,461 | 8.81% |
| Missed the best 10 days | $16,246 | 3.29% |
| Missed the best 20 days | $9,748 | -0.17% |
| Missed the best 30 days | $6,399 | -2.93% |
Source: https://www.putnam.com/literature/pdf/II508-ec7166a52bb89b4621f3d2525199b64b.pdf
As you can see, missing the best 10 days would cut an investor’s returns in half. So, while it can be tempting to try and time the market to avoid the worst days, it’s nearly impossible to avoid the worst days while also capturing the best days at the same time.
So, when is the best time to start investing in the market?
The simple answer is now. Because as we’ve just seen, investing in the market and staying invested over the long-term – even during periods of downturns – will yield positive results. If the current financial and economic outlook seems scary and you’re waiting for the right time when all news is good news, you may be waiting so long that you never invest at all.
Smart investors (including investment legend Warren Buffet, CEO of Berkshire Hathaway) don’t allow current events or the news to affect their investment decisions. That’s because changing your investments based on emotions goes against the time in the market investment strategy. If you are nervous about finding the right time to invest, a good strategy for you might be to set up a Pre-Authorized Contribution (PAC) plan where a pre-arranged amount is automatically withdrawn from your chequing account on a regular timeframe and deposited directly into your investment account. This eliminates the fear of investing at the wrong time since you’ll be investing regularly at many different times.
Of course, timing isn’t everything.
Just as important as time in the market, is taking the time to understand what kind of investor you are. If you have a high-risk tolerance and a long investment time horizon, for example, you may be willing to invest in more speculative investments. And if you’re more conservative, you may only feel comfortable with fixed-income investments. If you’re like most people, you’ll likely fall somewhere in between.
You’ll also want to consider your financial goals and create a portfolio that can help you achieve them. The best way to do that is with the help of a professional advisor who will take the time to understand you, your goals, your risk tolerance, and suggest the right mix of investments that would suit you best.
“I meet with my clients at least once a year to review their goals and make adjustments as needed, whether that’s to rebalance their portfolio, revisit their risk tolerance, or take advantage of potential investment or tax opportunities,” says Brad Thompson, Certified Financial Planner professional. “Meeting regularly also gives my clients peace of mind about investing in the market.”
Want more information on investing? We can help with that.
Educators Financial Group understands your pay grid, pension, and the unique financial challenges you face. That’s how we’ve been able to help education members save for the retirement they want since 1975. We can do the same for you.
October is Investor Education Month so it’s the perfect time to book a complimentary consultation with one of our financial advisors who will work closely with you to understand your financial picture and help you make the right investment choices.
