20

I'm interested in investing in domestic (e.g. S&P 500) and international index funds. My investing time period is 30-40 years. This is irrational, but I'm worried about investing now because the stock market seems quite inflated. Like others, I'm wondering if it's better to start investing when there's another major crash. My question is: can I receive more evidence and reasoning about why it's better to invest now rather than waiting for the market to dip again? By dip I mean when the S&P500 ETF dips below the lower Bollinger Band within a 5-year window.

Reading the articles below, it appears that it doesn't matter WHEN you start investing. I found these points compelling, but would appreciate more elaboration.

  1. As one person puts it, "amortized over decades, the difference on average will be negligible.

  2. Another person points out that over the past few decades, the trend for the us stock market has been to go up. If I were to have waited for a significant dip, I wouldn't have invested until the dot com crash and missed out on several decades of growth.

  3. Dollar value or cost averaging helps me spread out the risk of any major drop or increase.

Sources: Does it make sense to buy an index ETF (e.g. S&P 500) when the index is at an all-time high?

Evidence for timing market in the short run?

Does it make sense to buy an index ETF (e.g. S&P 500) when the index is at an all-time high?

Community
  • 1
user3314418
  • 323
  • 2
  • 7

4 Answers4

25

Your chance of even correctly recognizing the actual lowest point of a dip are essentially zero, so if you try to time the market, you'll most likely not get the "buy cheap" part perfectly right. And as you write yourself, while you wait for the dip, you have an ongoing opportunity cost.

Cost averaging is by far the best strategy for non-professional and risk averse investors to deal with this.

And yes, over the long run, it's far more important to invest at all than when you do it.

Michael Borgwardt
  • 8,214
  • 1
  • 31
  • 38
13

With a long enough time horizon, no matter when you buy, equities almost always outperform cash and bonds. There's an article here with some info:

http://www.fool.co.uk/investing-basics/how-when-and-where-to-invest/

Holding period where shares have beaten cash

  • 2 years: 67% of the time
  • 5 years: 75% of the time
  • 10 years: 93% of the time
  • 20 years: 99% of the time

There was a similar study done which showed if you picked any day in the last 100 years, no matter if the market was at a high or low, after 1 year your probability of being in profit was only 0.5, but after 10-20 years it was almost certainly 1.0.

Equities compound dividends too, and the best place to invest is in diversified stock indices such as the S&P500, FTSE100, DOW30 or indices/funds which pay dividends. The best way to capture returns is to dollar cost average (e.g. place a lump sum, then add $x every month), to re-invest dividends, and oh, to forget about it in an IRA or SIPP (Self invested pension) or other vehicle which discourages tampering with your investment.

Yes, values rise and fall but we humans are so short sighted, if we had bought the S&P in 2007 and sold in 2009 in fear, we would have missed out on the 25% gain (excluding dividends) from 2007-2014. That's about 3% a year gain even if you bought the 2007 high -beating cash or bonds even after the financial crisis. Now imagine had you dollar cost averaged the entire period from 2007-2014 where your gain would be. Your equity curve would have the same shape as the S&P (with its drastic dip in 2009) but an accelerated growth after.

There are studies if you dig that demonstrate the above. From experience I can tell you timing the market is nigh impossible and most fund managers are unable to beat the indices. Far better to DCA and re-invest dividends and not care about market gyrations! ..

Community
  • 1
Dr. Andrew Burnett-Thompson
  • 231
  • 1
  • 4
10

This simulation game uses actual historical S&P 500 data to test whether you can "time the market." You start with $10,000 invested, and it plays back 10 years of index values, in which time you can choose to sell (once), and if you do sell you can subsequently buy (once). Then you find out how you did relative to just holding what you started with.

If you play it enough times, you might eventually beat it once. I never did.

Nathan Ellis Rasmussen
  • 101
  • 1
  • 2
0

Unless you have inside knowledge or systems knowledge of the whole, the price is more likely to rise the longer you wait, given it`s history (which is why you want to invest anyway, right?).

Mark Rosenblitt-Janssen
  • 109
  • 3