When Is The Right Time to Invest?
You miss 100% of the shots you don’t take.
Starting to invest can be scary; jumping in means putting your money at risk. Perhaps you have already invested some capital and are waiting to put more money to work. Given the recent news of markets at all time highs, is this the right time to do so? With headlines like ‘Froth’ concerns linger as stocks remain near all-time highs, and Why It’s Time To Book Profits In The Stock Market, there is no shortage of news when it comes to investment concerns.
Remember, the primary basis of investing is accepting a level of uncertainty for the promise of higher returns in the future. Stock market returns are volatile both upwards and downwards. You never can tell when the punchy positive returns will occur — 2020 is a good case in point. In fact, just this month, after a tepid start to 2021 where January returns were flat, February market returns occurred in a fast and furious manner. You will not experience such returns or achieve your goals if all your money was in fixed deposits or bonds.
Staying out of the market means that you lose the power of compounding. A simple example is shown below. Assuming a 10% average annual return (which the stock market can provide), and investing just $16,000 early on (as seen in the left column) allows an individual to reach $1 million despite no contributions from age 27 to 65. This is compared to another investor who regularly invested $2,000 every year for 38 years, contributing a total of $78,000, who still ends up with less.
Another point worth highlighting is that it does not matter whether you invested at a market peak or trough - as long as you have the ability to hold on for a period longer than 10 years. The illustration below shows this clearly by analysing the stock market over an extremely long period of time (using US market data). Although holding on for 10 years does not always guarantee that you come out with a positive return, it holds true 96.5% of the time. However, holding it for 20 years guarantees a positive outcome. Good news for investors who still have 20 years to spare. If not, educating your children about this will allow them to benefit from this outcome.
A common misconception held by investors is that everyone wishes to invest and will put their money to work after a decline. This is presumably done to achieve a lower price to get a higher return in the long run. You may be surprised to discover that there is absolutely no difference between investing at a market high and investing after a decline of -10% or more. Why is this so? Likely because of market momentum and simple mathematics. The research below illustrates this point.
Therefore you don’t have to worry about markets being at all-time highs or buying at an “expensive” rate. After all, if markets are going up 70% of the time, this means that markets are mostly at all-time highs perpetually. Research also shows that new market highs have not been a harbinger of negative returns to come. The stock market (using US market data as a proxy) went on to provide positive average annualised returns over one, three, and five years following new market highs.
Despite all the evidence shown, you may still be uncomfortable investing all your money in one go or in one lump sum. A way to get around this behavioural bias is to feather it in over time, a method called dollar-cost averaging. Take six months and put that money to work for you over the course of that period. This way, you avoid a single injection of capital, alleviating your fears that tomorrow will be the day the market goes down. However, as the example on compounding and market predictions shows — don’t take too long to do it. We don’t know when the market is going to come down, but we also don’t know when the market is going to take off either.
