- There is always an apprehension that one could be investing at the wrong time
- Mathematically, compounding matters far more for returns than getting the timing correct
- “Time in the market” matters much more than “timing the market.”
I often get asked:
“Is this a good time to get into the market? The markets seem high right now, or the markets could go lower: what should I do?”
Over the years, new clients, that bring in new capital not invested, are worried about buying at the right time. Long time clients of mine know that I advocate a one-third at a time mantra, for putting new capital into the market: getting some money to work right away, and them agreeing on a time-line for the additional allocations.
While it’s true that there might be circumstances where it could make sense to take a measured approach to invest, I will always ask clients: “how clear is your crystal ball, mine is always cloudy.”
Some will say: “let’s wait until there is a pullback.” In practice, though: these pullbacks are unpredictable. We don’t know how long they last. One could wait for the pullback to continue, only to see a sharp rebound the next day (as has been the case recently). It’s a question of having the fortitude to execute when the time arrives truly. And anyone can be an armchair guru: only with hindsight do we know the extent of any pullback.
I have included a chart below and an article on Market Timing. Let's compare three investors who deposited $10,000, and all contributed $1,200 annually. The first investor perfectly timed the market and invested the $1,200 on the annual low for the market. The second investor invested $1,200 on the annual high, and the third investor made a lump deposit on the first day of the year.
Guess what, despite the timing differences, the three investor’s outcomes were not that different:
The chart above is a good illustration of what an investor ought to be doing when they are putting new money into the market. Assuming your investment horizon is longer than a few years, the best approach is always to get the money invested. Over a shorter time period (there is another chart from 2000-2007), there isn’t that much of a difference. And indeed, no one can time the market consistently.
Still reeling from my weak predictions to date: this week, Friday will be Valentine’s Day, and I predict that many will be buying flowers or chocolate or making restaurant reservations all at the last minute. I am sure of that, including yours truly!