As the Dow has climbed through 19k and 20k and now close to 22k, you may have wondered if you should have “more money in the market.” Or looked at some of your cash or some of your bonds sitting there placidly and said, “Hey, maybe I should have put that money into stocks…but now, the market is too high, and it’s too late…and I missed the boat.”
Here in lies the conundrum of investing, “Wes, hey man, should I get in now…?” Because I know that you don’t want to “time” the market wrong. No one wants to have “bad timing” and for good reason. The market, despite the pull back, is still within striking distance of an all-time-high and as investors, we feel like we HAVE to have good timing in order to have investment success.
Newsflash: Investing success is less about perfection and more about participation.
Let me go through the numbers from a study just released this year from Charles Schwab to explain why timing perfection is less important than participation.
Here we are simply looking at what $10,000 grows to over a certain period of time. In each period, or main block of time, $10k is put to work right before a large market correction, then given time (25, 17, 15, 8 and 5 years) then re-run for each block of time (25, 17, 15, 8 and 5 yrs.)
Essentially we are looking at relatively short or intermediate time periods (8 and 5) to some more lengthy time periods (15, 17, and 25) and comparing how much money $10k would grow to time with perfection, versus the worst possible timing you could have.
I’ll go further and most importantly compare these results to having money invested in cash/CDs.
So what does $10,000 turn into over different time periods (A-E).
A. Starting in 1990. This first one is a 25 year study…1990 until 2016. $10k with the perfectly worst timing possible grew to about almost $100k, (there was a 4 month bear mkt in 1990) vs impeccable timing (right at the bottom of the 1990 correction, that resulted in $113k. Not a tremendous difference and both were handsomely better than the results of a cash equivalent (money market or CDs), where $10k turned only into $20k.
B. What about starting in 1998…either right before a 20% correction or perfectly at he bottom of the almost 20% correction…? This one runs for 17 years, 1998 until 2016…The worst timing: $25k, best timing $29k. Cash, $14k.
C. Here’s one…what about right before the tech crash in 2000? This is a 15 year time period. This one was massive…the S&P 500 down 49%. The worst timing $10k still turned into $18k, The Best Timing $30k, cash $12k. So even the worst timing still beat cash by 42%.
D. How about investing right before the Great Recession/Financial Crisis – this one is an 8-year timeframe: Best timing $29k, worst timing $16k, cash practically flat (as interest rates were near zero during this span). So even bad timing beat cash by 54%.
E. 5 yrs beginning in 2011 pre or post a near 20% correction. Perfect timing $18k, terrible timing, $16.5k. With cash you made $13 bucks on $10k. So, in this case bad timing still beat cash by 66%.
Understanding this market history helps us focus in on what really matters in investing…participation, not perfection. And of course, this market history reminds us again about the importance of time.