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.
FAQs
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.
Who said time in the market not timing the market? ›
In the words of Kenneth Fisher, “Time in the market beats timing the market.” Academics have demonstrated time and again that systematically investing in factor portfolios would have outperformed the market over the long term.
Does the S&P 500 double every 7 years? ›
We saw in the previous section that investing in the S&P 500 has historically allowed investors to double their money about every six or seven years. Your initial $1,000 investment will grow to $2,000 by year 7, $4,000 by year 14, and $6,000 by year 18.
What is time in the market not timing? ›
What Does Time In The Market Mean? “Time in the market” means relying on a strategy where you don't try to guess when the market is at its lowest or highest point. Instead, you buy the market knowing that your timing is probably going to be off, but that eventually, the fundamentals matter more than the timing.
What is the 10 am rule in stock trading? ›
Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour. For example, if a stock closed at $40 the previous day, opened at $42 the next, and reached $43 by 10 a.m., this would indicate that the stock is likely to remain above $42 by market close.
Why do people say not to time the market? ›
There is much potential to lose money when market timing. You would obviously lose money if you have to sell stocks or other securities at a loss because the price fails to increase.
Is it better to buy-and-hold? ›
Buy and hold investors tend to outperform active management, on average, over longer time horizons and after fees, and they can typically defer capital gains taxes.
Is 10% return on investment realistic? ›
Usually the implication is that they can expect, over a long time, a 10% return. Fortunately some ask, with some doubt, "Is a 10% return really reasonable?" It is not. While the average growth or return in the market (e.g., the S&P 500) is about 10%*, investors over time do not see that.
What is the Rule of 72 in finance? ›
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double.
How can I double my money in 3 years? ›
Here's a look at some options:
- ULIPs. ULIPs are a type of financial product that combines life insurance coverage with investment potential. ...
- Mutual Funds. Offer a higher rate of return than other options despite market risks. ...
- Corporate Bonds. ...
- National Savings Certificate. ...
- Tax-free Bonds. ...
- Gold ETFs. ...
- Real Estate. ...
- Stock Market.
"Price is what you pay. Value is what you get."
Does Warren Buffett timing the market? ›
“Don't try to time the market.” This advice has been passed down often by successful investors like Benjamin Graham, Warren Buffett, Jack Bogle, and Peter Lynch through the decades.
What is the market timing scandal? ›
On Sept. 3, 2003, then-New York Attorney General Eliot Spitzer announced he was investigating mutual fund companies for practices hurting small investors. The companies were allowing special clients to make rapid mutual fund trades, in violation of their prospectuses and at the expense of fund investors.
What is the 15 minute rule in stocks? ›
You can do a quick analysis, adjust your trading strategy and get into a good position well after the crowd pulls the trigger on a gap play. Here is how. Let the index/stock trade for the first fifteen minutes and then use the high and low of this “fifteen minute range” as support and resistance levels.
What is No 1 rule of trading? ›
Rule 1: Always Use a Trading Plan
You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade.
What is the 11am rule in stocks? ›
It is not a hard and fast rule, but rather a guideline that has been observed by many traders over the years. The logic behind this rule is that if the market has not reversed by 11 am EST, it is less likely to experience a significant trend reversal during the remainder of the trading day.
Who introduced market timing theory? ›
In 2002, Baker and Wurgler expanded on the works of Modigliani and Miller (1958) by presenting their take on equity market timing theory.
What is the theory of market timing? ›
According to market timing, overvalued (undervalued) firms should issue (repurchase) shares when their shares are overvalued (undervalued). As the market corrects the pre-announcement misvaluation after the issuance announcement, the post-announcement stock returns should be lower (higher) for high-MB (low-MB) firms.
What is meant by the quote time in the market is more important than timing the market? ›
This means that it doesn't really matter when you enter the market if the value of your property will double in value over a 10 year period as it has over the last 40 years. What's important is that you hold the property for long enough to see compound growth.
What are real time market quotes? ›
A real-time quote (RTQs) is the display of the actual price of a security at that very moment in time.
