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 it's not about timing the market, it's about time in 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.
Is it better to DCA or lump sum? ›
DCA is generally used for more volatile investments such as stocks or mutual funds, rather than bonds or CDs. DCA is a good strategy for investors with lower risk tolerance. Investors who put a lump sum of money into the market at once, run the risk of buying at a peak, which can be unsettling if prices fall.
How much was $10,000 invested in the S&P 500 in 2000? ›
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. 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.
What is Warren Buffett's famous quote? ›
"Price is what you pay. Value is what you get."
What does time in the market not timing the market mean? ›
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. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Is it better to invest all at once or monthly? ›
A 2021 Northwestern Mutual Life study showed that investing a lump sum generally outperforms dollar-cost averaging over various periods of time. Just keep in mind that this is based on past historical performance, so it doesn't necessarily mean this will remain the case in the future.
How long should you dollar cost average? ›
However, if it's a substantial amount like proceeds from selling land or a business, it's better to spread it out over 10 to 12 months. Now, regarding consistency, even if you receive an annual bonus, you can allocate a portion to long-term investing and put it in once a year. That's still dollar-cost averaging.
Does dollar-cost averaging really work? ›
Dollar-cost averaging is one of the easiest techniques to boost your returns without taking on extra risk, and it's a great way to practice buy-and-hold investing. Dollar-cost averaging is even better for people who want to set up their investments and deal with them infrequently.
What happens when you invest $500 a month
| Rate of return | 10 years | 30 years |
|---|
| 4% | $72,000 | $336,500 |
| 6% | $79,000 | $474,300 |
| 8% | $86,900 | $679,700 |
| 10% | $95,600 | $987,000 |
Nov 15, 2023
If you're still investing $100 per month, you'd have a total of around $518,000 after 35 years, compared to $325,000 in that time period with a 10% return. There are never any guarantees in the stock market, but with the right strategy, a little cash can go a long way.
What if I invested $1000 in the S&P 500 10 years ago? ›
So imagine you put $1,000 into either fund 10 years ago. You'd be up to roughly $3,282 with VOO or $3,302 from SPY. That's not exactly wealthy, but it shows how you can more than triple your money by holding an asset with relatively low long-term risk.
What is the 11am rule in the stock market? ›
This rule suggests that significant trend reversals often occur before 11 am Eastern Standard Time (EST) during the regular trading session.
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 15 minute rule in stocks? ›
A sell signal is given when price moves below the low of the 15 minute range after a down gap. It's a simple technique that works like a charm in many cases. If you use this technique, though, a few caveats are in order to avoid whipsaws and other market traps.
Who wrote the market timing theory? ›
The author maintains these factors as they were pioneers to this theory on Market Timing Theory (MTT) introduced by Baker and Wurgler (2002).
Is there a better time in the market than timing the market? ›
The old adage, “it's not about timing the market, but about time in the market,” has been proven true over the years. Research shows that those who stay invested over the long run in a well-diversified portfolio will generally do better than those who try to profit from turning points in the market.
What is timing the market and time in the market? ›
Does Time In the Market Beat Market Timing ? Nobody can exactly predict a stock's future price but that doesn't stop many from trying to do so. Study after study over the years has shown that “market timing” does not work and that “time in the market” is the way to go.
What is the theory of market timing? ›
The market timing hypothesis is a theory of how firms and corporations in the economy decide whether to finance their investment with equity or with debt instruments. It is one of many such corporate finance theories, and is often contrasted with the pecking order theory and the trade-off theory, for example.
