This week I am sharing my thoughts about timing the market versus time in the market using two made up examples. Here is a short story about two individuals GK and MK who lived through the last 94 years. 

Worst Market Timer

GK is the worst market timer. He is afraid to invest in the stock market because he might lose money so he keeps his savings in a bank account. However, he likes to stay on top of the news and watches the business news religiously and stays up to date on what is happening in the stock market.

In the years when the market turns euphoric and goes up 30% or more, he cannot contain himself and he invests in the stock market in those years. That is why he is the worst market timer. Once he puts that money in the stock market, he just leaves it there. He doesn’t sell those investments. In the last 94 years, the S&P 500 went up 30% or more only 9 times. Here is the data showing the S&P 500 returns for the last 94 years. These were the nine years in which S&P 500 stocks went up 30% or more. You can probably guess that most of the times the market reached a top in these years. In other words, these were the worst possible times that GK decided to invest. 

For example: 

  1. 1928  +37.88% (just before the great depression)
  2. 1933  +46.59%
  3. 1935  +41.37%
  4. 1945  +30.72% (world war ending)
  5. 1954  +45.02%
  6. 1958  +38.06%
  7. 1975  +31.55%
  8. 1995  +34.11%
  9. 1997  +31.01%

These are his results after investing that $9,000 at the worst possible times. At 6/24/2021, that $9,000 would turn into $1,415,543, a Return of Investment (ROI) of about 15,628% compounded annual growth rate (CAGR) of about 6%. You can see this calculation here.

No Market Timing

On the other hand, there is MK, who has no interest in the stock market. She does not watch the news but rather focuses her time on things that she enjoys. She did however read about the benefits of compounding and knows that over time the stock market goes up an average of 7-8% per year. So, she invests $1,000 every year in the S&P 500 stocks regardless of the direction of the stock market. Doesn’t matter if the market is up, down or sideways. She invests this $1,000 like clockwork every year and leaves it there.

In the last 94 years, this $1,000 investment every year will grow to $10,291,627, a ROI of 10,848% and a CAGR of about 7%. Once again the calculation is here.

Lessons

In this made up story, GK is obviously me and MK is my 13 years old daughter who I hope will learn a thing or two from these writings. This example was instructive to me. Here are the lessons that I can draw from these stories

  1. Lots of people I talk to are scared of investing in the stock market because they want to pick the bottom. They are afraid that the market may fall quickly after they make a buy. This example shows that even if you invested in the stock market at the worst possible times in the last century, you will still come out way ahead of savings and checking accounts. However, you must leave your investments alone and give it time to ride the bad news out.
  2. If you look at the calculations in the spreadsheet that is linked above, the initial $1,000 that GK invested in 1928 did not recover until 1933 because there was a great depression. Sometimes, you have to give time to your investments to work out.  
  3. This bears repeating. Compounding is the eighth wonder of the world. Those who understand it, earn it. Those who don’t, pay it. (Credit Card Debt)
  4. Timing the market tops and bottom is nearly impossible. What is more important is letting your investments have the time to grow. In these two examples, after the initial 15 years or so, the value of the investments never dropped below the principal amount again.
  5. The initial 20 years in this example is probably the worst time to be an investor in the last century. Think about it. We had a great depression markets lost about 80% of their value), a World War and so many other events that negatively affected the stock market. In spite of this and the fact that we only invested at market tops, the ROI is amazing because we allowed our investments the time that they needed to grow. 
  6. If you invest in an index on an automatic schedule no matter what news is going on, over time your investments will earn about 8-10% every year. That is the easy part. The hard part is leaving your investments alone.
  7. When you see the market falling 20,30, 40% in a year, you might get scared and end up selling your investments. That is the worst mistake that you can make. The investments that you will make in those years when the market is down will enable you to earn above average returns.

No matter how you spin it, various examples have shown that index investing can work wonders over the long-term. It is boring but beautiful. No fancy trading charts. Just automatic investments over a long time can change your family’s fortune over time. Are there any other lessons that you can draw from these stories? Feel free to share them below.