How To Time Markets; When Is Best To Invest?
When to invest is a big question facing many budding and experienced investors. The answer seems difficult and has caused a fair few headaches, but here is an example of when to invest that gives a clear answer.
Back in the day, there were three friends, Lil Lows, Pearl Peak and Colin Constant that each made a New Year’s Resolution to invest their money. They entered into a wager back in 1980 to invest their respective monies for the next 40-odd years.
Each of the friends set aside $250 at the beginning of each and every month from 1980 until the end of March 2020, and decided they could only invest in the S&P 500.
Lil Lows and Pearl Peak took a very active approach to investing, while Colin Constant tends to let things happen on autopilot, because he feels like he doesn’t ‘understand’ markets well enough to time them.
What did Lil Lows do?
Lil Lows was always big on getting ‘hot tips’ from others on when to invest and what to invest in. Lo and behold, Lil Lows wasn’t a very sharp investor, so he consistently bought into the market and invested his money when prices were most expensive. Basically, Lil Lows always bought at the very top. He would sit on his money waiting for the best time to ‘enter’ the markets, and in the meantime his cash still earned some interest at a rate of 2% pa (which is generous by today’s standards). Time after time he would buy some shares of the index and watch them plummet right after. Once the market peaked again, he would invest all his cash.
What did Pearl Peak do?
Pearl also took a Lil Lows’ hands-on approach, but she had a crystal ball that a witch gave her years ago, so she was able to see into the future. She always bought when the market had bottomed, getting the best prices imaginable. Nobody has ever managed to do as well as Pearl did when it came to choosing when to invest. She also sat on her cash, earning 2% interest until a buying opportunity came along and then she purchased a big chunk each time.
What did Colin Constant do?
Colin felt lost and confused but he was easy-going, so he took a totally different approach. Colin simply took his $250 and invested it at the same time each and every month; he didn’t wait for market ups or downs. This means he invested both at the top and bottom of market fluctuations, but he never had money in cash earning 2%. Instead, his return was whatever the S&P 500 was returning. Colin took what is known as the Dollar Cost Averaging approach, he didn’t have to think about his money, he simply ‘set it and forget it’.
What were the results?
Lil Lows had the most awful timing of any human, but his total investment of $121,000 still grew to an impressive $729,100 by April of 2020. Not bad all considered, a gain of over 5 times what he put in.
Pearl and her crystal ball did even better. Much better. Pearl’s money grew to $1,059,263 by April 2020. This was almost 9 times what she put in and over $300,000 better than Lil Lows.
Colin forgot about his account and checked it in April 2020. He saw his balance was $1,533,208. A gain of more than 12.5 times his invested money and still a remarkable 45% more than Pearl, who could “see” the future!
Each friend invested $250 a month, a total of $121,000 spread over 40 years and 4 months with varying degrees of success. The difference in their final balances are stark. Colin’s balance was over double Lil Lows’. This goes to show you that tampering with your portfolio can severely hurt you much later on, and even if you do get lucky or time things perfectly, you still may not come out ahead.
KiwiSaver, by its very nature, follows the Dollar Cost Averaging method as payments are made regularly alongside your income.
Three Key Takeaways
1. Being the best isn’t really the best: Pearl could see into the future and still had only 2/3 of what Colin did. Even though Pearl timed things perfectly, there was still a better approach.
2. Be patient: Compounding growth can make a huge difference, but it needs time to really be visible. The more time, the better. Think of this easy formula:
Compounding Growth + Time Invested = Long-Term Growth.
3. Keep it simple: It’s easy to over complicate things like investing. Luckily, Dollar Cost Averaging shows that it can be easy. Attempting to ‘time’ markets could be a waste of time, energy and money.
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
March saw the Coronavirus have a more tangible effect at home, with the move to lockdown in New Zealand taking it from a global event to something with a very clear impact on our day-to-day lives. Meanwhile, share markets around the world continued to be volatile, with the US S&P 500 index staging a dramatic partial 18% recovery in three days towards the end of the month.
The RBNZ put out a proposal last week to remove the existing LVR rules for new property purchases for a period of 12 months. It is almost through a seven day consultation process with the lenders, and if implemented will be in effect until 1 May 2021. The RBNZ will monitor the market over the next year, and decide whether the LVR restrictions are needed in the future.