Market timing and investing
“Should I start investing now or wait till stock prices go down?” [or] “What is the cost of waiting to invest?”
It’s often a good idea to consider investing as soon as you can. While the stock market goes up and down from day to day, your financial professional can show you how to potentially reduce the risk of buying at the market top by using a simple tool called dollar cost averaging.*
When the stock market rises, many investors find themselves eager to invest and start benefiting from stock price gains—but also concerned that they may be buying at the top and at risk of losing money if the market takes a tumble. Yet if you have a relatively long time horizon, it may be a good idea to consider investing now, depending on your particular set of circumstances and tolerance for risk.
Starting now gives you more time to benefit from compounding
That’s because time can be on your side. The longer you have before you’ll need the money, the more time you have to benefit from market upswings and recover from market downturns.
A longer time horizon allows you to benefit from compounded returns—that is earning potential market returns not only on the amount you invested, but on the returns you earned last year and in all previous years.
For instance, say you start investing for retirement at the age of 45 and make regular monthly contributions of $200 to your account for 20 years. Let’s assume you earn 6% a year. By the time you reach retirement age, you’ll have $1,114,442.64 saved.** Not bad, right?
Now let’s look at what happens if you start 10 years earlier at age 35? Again, we’re assuming you can invest $200 every month and you earn 6% per year. This time you end up with $2,422,890.28, more than twice as much than if you waited an additional 10 years.
Market timing isn’t an option
You may be thinking that investing the same amount every month is fine, but wouldn’t it be great if you could always invest right before the market went up, and sell just prior to the next rough patch? Theoretically, maybe, but the problem is that even the most experienced investors don’t know exactly when stock prices are going to go up or down. Instead, you risk buying when stock prices are up and sell when they’re down and you’ve gotten discouraged.
In fact, one study by the investment research firm Dalbar1 found that ordinary investors underperformed market indexes by nearly 1.5% per year over a 20 year period, largely because they tried—and failed—to time the markets.
Trying to time the market is almost always a mistake. But fortunately, there’s a simple, easy-to-use tool that can help you invest wisely.
* Dollar-cost averaging does not assure a profit or protection against loss in declining markets. To be effective, there must be a continuous investment regardless of price fluctuations. Investors should consider their financial ability to continue to make purchases through periods of low price levels.
** This illustrative example is entirely hypothetical. The 6% used in this example is not indicative of the actual performance of any particular investment, insurance contract, or other financial product. This example does not consider the impact of any fees, taxes or market losses. All investing involves risk, including loss of principal invested.
1 Source: Coleman, Murray. “Market Timing: More Evidence Why It Doesnt Work.” Index Fund Advisors, Inc. - Fiduciary Wealth Services, Dimensional Funds, 10 May 2021, https://www.ifa.com/articles/market-timing_more_evidence_really_doesnt_work/.
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