At some point every investor, trader, or stock picker has dreamt of buying a stock right before some major news turning him/her into a retired millionaire seemingly overnight.
It’s fair to think that way, and I’ve done it myself several times. After all we buy stocks to see our investment go up in value, and more than ever we live in an immediate gratification society. Who wouldn’t want to see a drastic increase in their investment’s value happen overnight instead of over several decades? But investing is, and should be, a long and drawn out process.
Some investors try to take short cuts to wealth by trying to time the market. They try to get in before a stock, an ETF, or the entire stock market takes off, or they try to get out before an investment comes crashing down. If done right the investor participates in all of the gain with no loss. Wouldn’t that be great? But, doesn’t that sound too good to be true?
It is too good to be true. At least on a consistent basis it is. You might guess right once in a while, but you won’t guess right every time. But I have great news for you; there is a way to time the market to lead to substantial wealth growth over time.
It’s called time in the market. You can time the market by spending as much time as possible in the market. You stay invested in your retirement portfolio every single day; you don’t get out because you think a market downturn is coming, rather, you get in and stay in all of the time! And you continue to get in the market by continually investing money in it.
I wonder how many people got out of the market in 2010, -11, -12, -13, -14 thinking this market run up has to see a correction soon? Consider this, we’ve seen the S&P 500 Index nearly double over that time frame and sadly I know some investors who didn’t participate in that wealth growth because they were trying to time a market downturn. They guessed wrong.
The fact of the matter is a lot of the stock market’s big gains and losses are concentrated in a just a handful of trading days throughout the year. You don’t see a slow, steady and consistent increase or decrease in the market over a specific time frame.
Anyone who invests knows the market is extremely volatile and prone to drastic movements. This makes it even harder to time the market because you’re dealing with a roller coaster of an investment ride, but it’s not like an amusement park where you hear the click click click of the chain as you approach the big drop.
Consider this example of why time in the market is what really matters:
There’s 35 year old you who decides to invest $250 a month until retirement at 65; then there’s 35 year old you who waits until 45 to start investing $250 a month until retirement at 65. Both sets of investments get a yearly 7% return. When you started at 35 your portfolio’s value at 65 grew to almost $305,000, but when you started at 45 your portfolio’s value at 65 grew to just over $130,000. Simply put time in the market matters. Time in the market is what will produce excessive wealth growth for your retirement, not timing the market.
What you as an investor should be focusing on instead of timing the market is how to maximize your time in the market. Fortunately, the answer is very simple.
Start investing today in a diversified portfolio of low-cost passively managed investments (like the ones offered to you by Dimensional Fund Advisors and Vanguard). Don’t worry if you’re buying the market high for the next year or two. In the long-run it won’t matter, and don’t forget as investors we invest for the long-run, while others (market timers) trade for the short-run.
If your time horizon is long enough to support equity investing even at today’s prices you will buy in at a much lower price today than come retirement time. Don’t waste your time and money trying to fight the impossible to win market timing battle of predicting when to buy low and when to sell high. If you buy today and sell during your retirement you will do just that and with a lot less effort and stress.
If you don’t know if your time horizon is long enough for equity investing speak with a licensed investment advisor.
To learn more about Michael Pensinger, view his Paladin Registry profile.
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