As market volatility persists, it’s natural to feel concerned. It could be about the short-term performance of your investments, or concerns over inflation. But in this sort of environment, there is one question that is asked time and time again: “Is now the right time to invest?”
Let’s tackle this common question head-on in the context of a financial plan.
Going back to not-so-better times
To illustrate the impact of market timing on a long-term financial plan, let’s go back to the 2008 Global Financial Crisis. We’ll imagine two conservative investors, Nihal and Serena. Their financial plans call for a target return of 2.5-4.5%. In our hypothetical scenario, they will each invest $10,000 as a lump sum and $250 a month thereafter. They will both invest in a portfolio with a conservative asset mix – roughly 40% equities and 60% fixed income. Here’s where they differ:
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Investor #1 is Nihal. He happens to start his financial plan at the worst possible moment, investing his initial $10,000 at the market peak of June 2008 in a conservative portfolio. The S&P 500 falls over 40% from this point. But Nihal keeps going, adding his $250 a month as planned.
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Investor #2 is Serena. She packed her crystal ball for her financial planning meeting. With her perfect foresight, she invests her initial $10,000 in cash in June 2008, neatly avoiding the market’s peak and fall. She does the same with her subsequent $250 monthly contributions through to the market bottom of March 2009. At that point, she invests her cash into the same conservative portfolio as Nihal’s. Serena and Nihal make the same $250 monthly contribution to their identical conservative portfolios from this point on.
So how much of a difference did their timing really make between Nihal and Serena? Here’s what we can take away:
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By investing at the best moment, Serena unsurprisingly did better than Nihal. But not by nearly as large of a margin as you might expect. Her annualized rate of return to the end of April 2022 would have been 4.8%.
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Nihal’s annualized rate of return would have been 4.1% over the same time period – less than 1% shy of Serena. Remember, that’s in spite of the fact he was fully invested during the S&P 500’s staggering decline of more than 40%.
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Early on, Nihal did fall behind his plan’s target return range of 2.5-4.5%. But by sticking to his financial plan and making his regular contributions, he eventually ended up back on course. No special actions were required. In fact, Nihal had already returned to the lower end of his target range for returns as early as December 2010. From August 2012 on, his portfolio did not dip below the lower-return level again.
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Most importantly, both investors ultimately achieved the target return of 2.5-4.5% set in their financial plans. In fact, even as of April 2022, after the challenging start to the year, both would still be seeing results in the upper end of their range
You don’t need a crystal ball to reach your goals
It’s a stressful time right now to be an investor. There’s no arguing that. But it’s important to remember that a financial plan isn’t achieved overnight. More importantly, it also doesn’t crumble in an instant. The biggest asset a financial plan has is time, not timing. By sticking to a well-designed financial plan and making regular contributions, investors have the opportunity to achieve their financial goals – even Nihal, with his so-called bad luck.
“Without goals, and plans to reach them, you are like a ship that has set sail with no destination.” — Fitzhugh Dodson