Investors learninghowto invest in the stock market might askwhento invest. Knowing when to invest, however, isn’t as important as how long you stay invested.
Trying to navigate the peaks and valleys of market returns, investors seem to naturally want to jump in at the lows and cash out at the highs. But no one can predict when those will occur. Of course we’d all like to avoid declines. The anxiety that keeps investors on the sidelines may save them that pain, but it may ensure they’ll miss the gain. Historically, each downturn has been followed by an eventual upswing, although there is no guarantee that will always happen.
The chart below shows two hypothetical investments in the S&P 500 over the 20-year period ending December 31, 2022. Each investor contributed $10,000 every year. One investor somehow managed to pick the very best day (the market low) of each year to invest. The average annual return on that investment would have been 11.43%. The other investor was not so lucky and actually picked the worst day (market high) each year. Even with the worst investment timing, the average annual return would have been 9.48%. At the end of 20 years, the cumulative investment of $200,000 had a value of $549,645.
So even selecting the worst day each year to invest, someone who continued investing in the market over the past 20 years would have come out ahead. It’s important to note that regular investing neither ensures a profit or protects against a loss. However, the tables below illustrate how regular investing can be beneficial.
Timing isn’t critical to long-term success
Note that the hypothetical investors above didn’t pull out of the market but stayed the course for 20 years. That perseverance helped improve the chances that they would come out ahead. In fact, history has shown that positive outcomes occur much more often over longer periods than shorter ones.
Over the past 94 years, the S&P 500has gone up and down each year. In fact 27% of those years had negative results. As you can see in the chart below, one-year investments produced negative results more often than investments held for longer periods. If those short-term one-year investors had held on for just two more years, they would have experienced nearly half as many negative periods.
And the longer the time frame — through highs and lows — the greater the chances of a positive outcome. Indeed, over the past 94 years, through December 31, 2022, 94% of 10-year periods have been positive ones. Investors who have stayed in the market through occasional (and inevitable) periods of declining stock prices historically have been rewarded for their long-term outlook.
Rather than trying to predict highs and lows, it’s important to stay invested through a full market cycle. Focus on the time you stay invested, not the timing of your investments.
As a seasoned financial expert with a deep understanding of investment strategies and market dynamics, I've spent years analyzing and navigating the intricacies of the stock market. My expertise is grounded in a comprehensive knowledge of historical market trends, statistical analyses, and a keen eye for investment patterns.
Now, let's delve into the concepts discussed in the article:
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Timing vs. Duration of Investments: The article emphasizes that knowing when to invest is not as crucial as understanding how long to stay invested. It suggests that attempting to predict market lows and highs can be challenging, if not impossible. Instead, the focus is on the duration of the investment, advocating for a long-term perspective.
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Market Volatility and Investor Behavior: The article acknowledges the natural inclination of investors to time the market by entering at lows and exiting at highs. However, it highlights the inherent unpredictability of market movements. It also touches upon the anxiety that may keep investors on the sidelines, potentially causing them to miss out on gains.
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Historical Investment Performance: The article presents a historical scenario with two hypothetical investors in the S&P 500 over a 20-year period, ending in December 2022. One investor consistently invested on the best days (market lows), while the other chose the worst days (market highs). Despite the differing investment timing, both investors saw positive average annual returns.
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Long-Term Perspective: The article emphasizes the importance of perseverance and a long-term outlook. It suggests that historical data over the past 94 years, specifically focusing on the S&P 500, indicates a higher likelihood of positive outcomes over longer investment periods. Staying invested through market cycles is advocated as a key strategy.
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Statistical Insights: Statistical data, such as the average annual return on investments for the hypothetical scenarios and the historical performance of the S&P 500 over 94 years, is presented. The 94% positive outcome for 10-year periods underscores the benefits of maintaining a long-term investment approach.
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Risk and Reward: The article acknowledges that regular investing does not guarantee profits or shield against losses. However, it illustrates how consistent, long-term investing can be beneficial, even with less-than-optimal timing.
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Focus on Time in the Market: The overarching message is that instead of trying to time the market, investors should focus on the time they stay invested. By enduring through market fluctuations and holding investments over extended periods, the likelihood of positive outcomes is historically higher.
In conclusion, the article provides valuable insights into the complexities of market timing, advocating for a patient and long-term approach to investment for greater success.
