As the equity markets are in solid correction territory (more than 10% decline from recent peak) and probably on it’s way to being a bear market (20% decline), people are wondering whether they should invest right now. The answer is yes. You should invest right now. Marketing timing is pointless, as shown by the story below.
This article (actually none of my articles) can be considered investment advice. Always make your own decisions regarding investments.
The story below is inspired by this post by A Wealth of Common Sense.
An introduction to investing in stocks, bonds, index funds.
Market Timing isn’t Bob’s Cup of Tea
Meet Bob, the world’s worst market timer. Imagine my name being Bob, and discovering investing at 22 years old in 1970.
Bob my set of Fire The Boss skills, such as starting to save a lot of money from a young age, and increasing savings as time passes.
Bob wanted to invest in stocks, but he was afraid that investing in stocks is stupid. He only felt comfortable investing his money after a major bull market.
This very definition made Bob only invest at market peaks, right before some incredible crashes. But because Bob was investing for the long term, he never sold, not even during the worst recession.
Saving and Never Selling is a Winning Strategy
Bob starts saving 2,000 per year, starting in 1970. He also increases his savings by 2,000 per year every decade. In the 80s he’s saving 4k per year, in the 90s 6k and so on.
In 1972, with the S&P 500 at an all time high, he invested his money (6,000) into the index. The following crash in 73/74 was huge, and Bob lost almost 50% of his net worth. How incompetent he was in timing the market, he kept saving and he did not sell a share.
Only in 1987 he was confident enough to make another investment in the market. He saved up a cool 46,000 and invested it all at once. As you might have guessed, the market dropped by 30%.
In 1999, when internet stocks were the hype, Bob invested 68,000 and the market reacted by dropping 50%. His final investment before retiring was in 2007, just before the great recession. Bob invested 64,000 and of course the market declined massively, by 50%.
Not showing off your wealth is also a winning strategy. Read my book review about The Millionaire Next Door.
Results of Bob’s Crappy Market Timing
With a total investment of 184,000 Bob didn’t do too bad for himself. He kept buying at market peaks, but amassed a 1.1 million retirement account for himself in 2015!
Of course the story above is purely hypothetical, but the message holds true. The numbers are real, although Bob could have been wiser to include bonds and international stocks in his portfolio.
If he were smart enough to dollar cost average into the market every year he would have retired with as much as 2.3 million!
This is the direct result of Bob’s ability to keep saving and never selling shares, not even with the market dropping 50%. So, are stocks currently overvalued? Maybe yes. Probably, even. But that’s no reason not to invest!
Be like Bob, and just invest during market peaks. But also be not like Bob, and invest every single month! Just invest and things will work out long-term (probably). Just build a habit for yourself.
I know I will. Markets tanking or soaring, I keep to my strategy.
How are you dealing with the current correction?
13 thoughts on “Market Timing is Pointless – As Told By Bob”
Same argument I tell my friends with respect to buying a home. If you need a place to live, buying is always the better option in the long run. Especially with interest as low as it is now.
Well, that depends. If you buy now and pay a lot of money, and in two years you want to move (or are forced to because of external factors) you might be under water (due to prices collapsing from corona or whatever). If you know you can afford it and plan to live there long term, then yes buying is most likely cheaper.
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Although I already knew the original article, it is one of my favorites!
Unfortunately the article did not calculate what amount of yearly dividend Bob receives, it must be huge.
Nice article and example. This is exactly what I am doing with my Vanguard account with a 50/50% (stock indexes /bonds funds) diversification. The more stock drops, the more I buy. It’s a long term winning strategy.
Happy new year!
Do you mean buying more shares with the same amount of money or do you buy more in money terms? The first would be dollar cost averaging, the latter would be timing the market ;-). Thanks for your thoughts and all the best wishes for 2019!
That is a good point! I try to keep it balanced at 50/50. For example, let’s imagine my portfolio has a total value of 10000. I would use half of it (5000) to buy stocks (ETFS, Index funds,…), and the other half to buy bonds funds (Corporate, treasury or goverment bonds). If stocks drop (as it is happening recently) then the balance won’t be 50/50 anymore, but let’s suppose 45/50. Then what I will do is rebalance it back to 50/50, rather adding extra cash from my pocket or selling shares of my bond funds to buy stocks. What do you think about this strategy?
My strategy is to rebalance by buying. That means I will buy more of the assets that underperformed, and less of the assets that over performed. After the monthly buys, I aim to be at my target allocation again. Of course this will not work with very large portfolios. The swings up and down will be larger than what you can buy monthly. In that case I will try to rebalance by selling and buying maybe once or twice a year, or when the asset allocation differs more than 5% from my target (say stocks target is 50%, when it dips below 45% I will rebalance).
For me it doesn’t matter right now, I mostly can rebalance by just buying with my monthly savings. This will probably change in the next year or two.
Remember: I don’t give financial advise. Do your own research and make your own choices :-).
OK, so Bob timed his investments in a terrible way and still had profit. It only suggests he could have even more profit when he timed his investments even better.
The lesson is that it doesn’t matter what you do. People tell me “I don’t want to invest right now because the market is too high”. Bob’s story teaches us it doesn’t matter, as long as you keep your strategy of always saving, and never selling. Of course, if he would have bought every month or every year, his average cost price would be much lower so his profit would have been higher. Thanks for commenting!
I started investing in 2001, and then the markets had a downturn at the end of 2001, on 9/11 and now it is not going so great either. I have never sold during any downturn. I have no plans to change this technique.
Once I retire (in about 12-15 yrs) I will have to do something, but so far I have no idea what that will be.
Thanks for your articles, I enjoy them. best wishes for 2019
Great to hear your strategy is working! Thanks for the comment and reading the blog, really appreciate it!
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