Should you wait for the market to reach its lowest point before you invest?
If you had to choose between (1) regularly investing $100 into the stock market each month or (2) saving $100 each month and only investing this money when the market “dips,” which would you choose?
Many believe we should wait and invest when the market hits its lowest point. With this in mind, you may be surprised to learn the results of an experiment that is detailed in this third video of our Timeless Truths for Investing series.
Read the Transcript:
Jason Myhre: “You don’t want to buy things when they are expensive and sell them later at a lower price. You want to do the opposite of that, you want to buy low later and sell high. There’s actually a systematic way that you can do this.
Let’s imagine that we were dropped into history somewhere between the years 1920 and 1979. Wherever we land, however, our task is that we have to invest in the US stock market for the next 40 years.
Now I’m going to give you a choice between two investment strategies that you can pick from. The first one, option one is very simple. You can invest $100 a month for that 40 years no matter where you land. Option two is you can save up that $100 a month keeping cash on the sidelines and you can wait when the market dips and you can try to buy those dips in the stock market. Now, with this option, I’m going to sweeten the deal. I’m going to grant you perfect knowledge of the future. You’ll always be able to buy them at those absolute bottom prices.
Question is, which of these would you choose? Option two sure is enticing, isn’t it? I mean, it just seems like a slam dunk. Well, someone ran this experiment and I want to share with you the results, and I’ll tell you how to read it. When this blue line is above the horizontal dotted line, what that means is that it was a period in history where the buy the dips strategy, which was option two, was the better choice to make.
70% of the time a monthly investment outperforms in history. Very interesting, 70%, pretty impressive. But I granted an enormous advantage to the second option, perfect knowledge of the future, right? None of us have this. And so in practice, that option two is very hard to get right. So let’s, let’s account for that. Let’s say we get it wrong by just two months in terms of that timing decision, and then re-crunch the numbers on this problem. And what we find is that when we do that, then this monthly investment outperforms 97% of the time, virtually the entire experience.
Now, how can this be? What is the magic of investing monthly? Well, it’s not magic, but it is a very simple concept, and it’s called dollar cost averaging. A perfect example is our $100 dollars a month. Now the dollar amount can vary, the frequency can vary, but it’s a fixed amount of money at regular intervals over time.”