by There’s so much going on in the world: A pandemic, record unemployment, stocks hitting new record highs. Whether you’ve accumulated some savings, or you’re just curious about what to do with your paycheck, you may be wondering… Is now a good time to invest? The answer is an astounding yes, and this post will cover the reasons why now is a good time to invest.
Contents
Time in the Market Beats Timing the Market
Personal Finance Club does a great job at explaining why time in the market beats timing the market.
In his example, he uses 3 theoretical characters: Tiffany Top, Brittany Bottom, and Sarah Steady.
Tiffany Top invested at the top of the market.
She saved her $200/month in a savings account getting 3% interest, and invested all of her savings into stocks during 6 market peaks in the last 41 years. Her $99,000 she saved and invested over the last 41 years is now worth $773,358.
Brittany Bottom invested at the bottom of the market.
She also saved her money in a savings account earning 3% interest, but she correctly predicted the exact bottom of each of the five crashes and invested all of her saved cash on those days. Her $96,000 of savings has grown to $1,123,573 today.
Sarah Steady auto-invested every month.
Each month her account would automatically invest $200 more in her index fund at whatever the current price happened to be. She invested at every market peak and every market bottom. Her slow and steady approach had grown her nest egg to $1,620,708.
The moral of the story is that auto-investing every month yields greater returns than investing even when correctly timing the market bottom. That’s because her money wasn’t sitting for long periods of time in a low-yield savings account. Instead, her money spent more time in the market, earning an average of close to 10% every year.
This isn’t just theory either. Personal Finance Club ran the numbers based on historical figures, and you can find it in his post.
It is true what they say, time in the market beats timing the market.
Timing Your One-Time investment
The previous example was about multiple investments over a long period time.
What if you have just received an inheritance or a bonus from work, say $10000, and you’re wondering if now is a good time to invest. Maybe you can wait a few months for the market the drop, then dump your money in then?
Here’s why that is a losing proposition:
The long term average annual return of the S&P 500 (common benchmark of the stock market) is 10-11%. For the sake of simplicity, I will say it returns 10% a year. If we average that per year, we would average a return of 10%/12 months = 0.83% per month (straight-line, neglecting the effects of compounding).
That means that each month that you postpone putting in your market, you are forfeiting an average of 0.83% return. If you wait just 6 months, you are forfeiting an average of 5% return!
You may be tempted to dollar cost average your investment over a period. For example, you might want to invest your $10000 by splitting it up and investing $1250 every month for the next 8 months. By dollar cost averaging, you’ll be buying more stocks when the prices drop and you’ll be buying less stocks when prices increase.
Psychologically, this sounds like a good proposition. If the market tanks, you’ll be glad that you didn’t put in all of your money in one lump sum! But what if the market surges? You’ll be knocking yourself for not investing sooner.
Furthermore, remember how the stock market is expected to increase about 0.83% a month? Each month your money is not invested, means you’re missing out on a historic average return of 0.83% each month.
You have to remember that, time in the market beats timing the market.
Expert Predictions
“How can now be a good time to invest? I just read that the market is overvalued!”
Just check out this headline for an article published on Oct 1, 2018:
The average stock is overvalued somewhere between tremendously and enormously
Let’s say that the author had $10000 from a company bonus, but decided to just park his money in a savings account because he thought the stock market was overvalued. The money is his savings account was returning 1% interest per year. By August 2020, his savings including interest would amount to $10,183.
If instead he invested that $10000 in Oct 2018, he would have had $12,678.37 by Aug 2020. This equates to an annualized gain of 13.801%!
His prediction was 100% wrong and he would have foregone some healthy profits!
Humans are notoriously bad at trying to predict the future.
Neither I nor the “experts” know what will happen to stocks a year from now, or even 5 years from now. But I do know that the stock market tends to go up over long periods of time. The trendline is overwhelmingly positive. It’s worth repeating that over the last 90+ years, stocks have returned an average of 10% every year. Source: Investopedia
Reviewing the Fundamentals
No one can tell whether or not stocks are overvalued. Some people try to predict whether or not the stock market is overvalued by evaluating different market fundamentals.
One stock market fundamental commonly reviewed is the S&P 500 Price-to-earnings (PE) ratio.
The Current PE ratio is estimated from the latest reported earnings (trailing twelve months) and the current market price of the index.
The current PE ratio as of Oct 2020 is 28.89 which is significantly higher than the mean (15.82) and the median (14.83). Does this mean that the stock market is overvalued? Not necessarily.
The PE ratios were much higher in 2000 and 2009 during the dot-com and housing recessions, respectively. However, as you can see from the S&P 500 price history chart below, the S&P market index since both of those time periods has more than doubled, even without accounting for dividend reinvestment. You would have made a great returns if you invested even during periods when the market was considered “overvalued”.
Putting it all together
If you’re wondering if now is a good time to invest, my answer is a resounding yes. Now is a good time to invest for several reasons:
- Time in the market beats timing the market.
- You cannot time the market
- You’ll lose money if you try to dollar cost average your investment
- Neither you nor the experts can correctly predict a market downturn
- Market Fundamentals cannot adequately predict a market downturn
There truly is no time like the present. I don’t know who created this axiom, but it is true on so many levels. It’s true about investing. It’s true about chasing your dreams. It’s true about asking your crush to the prom =).
It doesn’t matter if the market crashes next year or even next month. You absolutely cannot predict the next crash, even though the experts try to. But if it does crash, you need not fear. The stock market has recovered from each and every recession.
If you wait to invest, you are losing out on close to 10% in gains per year, or 0.83% in gains per month. This money rightfully belongs to you. Claim it now!
Let me know your thoughts below.
What’s stopping you from investing right now?
