Sunday, September 21, 2014

The secret to investing at the optimal time (hint: the best time is now)

A market timing strategy that even a monkey can do
A market timing strategy that even a monkey can do
An old adage in investing is to buy low and to sell high.  It seems so simple that even a monkey could do it. Unfortunately, if it really were that simple, most of us would not be working anymore. All sorts of books promise to teach you how to time the market. One titled Market Timing for Dummies promises to teach you how to “use a wide away of market-timing tools” to help you “make money in any market”.  Despite the complexity of timing the market, one simple strategy will help you come out ahead all the time.

The difficulty of timing the market
In the last 13 years alone, we’ve experienced two crashes, one caused by the dot com bubble bursting in 2001 and another caused by the sub-prime housing crisis in 2008. Selling immediately before these crashes and then repurchasing your investments at the trough would have been extremely profitable.  Yet, timing the rise and fall is close to impossible. Several analysts predicted for years that the sub-prime mortgage industry would collapse and yet prices continued to rise despite the dire predictions. No one was able to predict when the fateful fall would actually happen.

Well then, when should I invest my money?
The secret to investing in the market is to invest right now, always. Whether you have a lump sum or only a little bit of cash, you should invest right away if you have money on hand. Over the long-term, the market has always increased in value. In the chart below, you can see the performance of the Dow Jones Industrial Average over 114 years from 1900 through the present day (9/21/2014).

Dow Jones Industrial Average performance from 1900 to 2014
Dow Jones Industrial Average performance from 1900 to 2014 from stockcharts.com
There are high points and very low points over the years in the market, but the direction has always been up over the long-term (or an approximately 10% compound annual growth rate per year). Even if you invested money immediately before the Great Depression in October 1929 or during the Great Depression, today you would still be far ahead of where you started. Given that over the long-term the market goes up, you tend to be better off investing today than you are investing tomorrow.

Not sure where to invest?  Read the post on deciding where to invest your 401k.

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