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.
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?