The costs of waiting to invest

Gloom and doom sells; it’s everywhere.   Someone is always predicting a market crash, and it’s often the same people who’ve been predicting market mayhem for years.  But at what point do you tune out their noise and focus on the facts?

A big part of our job as a financial advocate for our clients is keeping them focused on the forest, rather than the trees.  Over the next three months, we will highlight three interesting charts put out by Charles Schwab’s Center for Financial Research that will hopefully give nervous investors some perspective.

This month, we’ll examine the costs of waiting to invest.  The chart below looks at how four hypothetical investors fare overall 20-year time periods going back to 1926.  In other words, 1926 to 1946, 1927 to 1947, 1928 to 1948 and so on, up until the most recent 20-year period of 1995-2015.

Each of the first three investors (A, B, & C) put $2,000 a year for 20 years ($40,000 total) to work in the stock market (as measured by the S&P 500 Index).  The only difference between these three is in their timing.  The fourth investor (D) couldn’t tolerate the risk of stocks and kept their $40,000 in Treasury bills.

Investor A had impeccable timing, picking the exact market low each year.  FYI, no one is that good.  Investor B put their money to work immediately on the first trading day of each year.  Investor C had the worst luck of the bunch, choosing to invest at the market peak each and every year.  FYI, no one is this unlucky.  So what are the results of these four investors?

If you had perfect timing (Investor A), you ended up with just shy of $178,000.  If you would have invested on January 1st each year (Investor B), you’d have $165k.  Even with the absolute worst timing and investing at the market peak every single year (Investor C) you still manage to have $145,000.  However, if you stayed on the sidelines and invested only in T-bills, the result was $65k.  I don’t think I’ve found a better argument for an investor to put their money to work now, rather than waiting for a more attractive entry point.  Predicting the moves of the market is extremely difficult.  Even with poor timing you still finish with more than twice as much as someone who never puts their money into stocks.

As always, past performance is not indicative of future returns.  Before investing in stocks, you should consult your financial advisor to find out if stocks are right for your particular financial situation.

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Since 1995, Pittenger & Anderson has guided individuals and families going through money-in-motion events. We are a fee-only Registered Investment Advisor and a full-time fiduciary providing investment management, financial planning, and complimentary services to 800+ clients in over 30 U.S. states.

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