The Best Time to Invest, Ep #10
One of the most frequent questions I receive is asking when the best time to invest is. In this episode, I answer that question by reviewing a strategy that may help ease your entry into the market. In the Tips, Tricks, and Strategies section, I go over mutual fund expense ratios and explain why you might be paying a lot more than you realize. Listen to learn how to reduce those expenses.
In this episode...
When to invest [01:17]
S&P 500 [02:28]
Dollar-cost averaging [04:03]
Investing a larger sum [07:04]
Mutual fund expense ratios [12:16]
Active vs. passive management [15:19]
Is now a good time to invest?
The stock market can seem like a roller coaster. People often ask me, “Is now a good time to invest?” The simple answer is that it’s always a good time to invest long-term. With stock market history as a guide, more than likely, you’ll be glad to have invested today. You may even wish you’d invested more. Despite this, many are still hesitant to invest because they fear the market will drop as soon as they invest. No one wants to buy high, only to see investments go down.
The trouble is that it’s impossible to predict what the market will do. While a look at stock market history can serve as a potential guide, a qualifier should always be added that past performance is no guarantee of future returns.
Long-term investments
The S&P 500 is the average return of 500 of the largest publicly-traded companies in the United States. It’s not an exact investment proxy since comprehensive investment practice tends to have one invested portion internationally. However, the U.S. economy is the largest in the world, so it should be a decent proxy. Looking at the data since 1937 can show the probability of positive returns after specific periods of time. That data shows that an investment has a 63% probability of being higher than it began after one month. After one year, the probability of investments being higher is 77%. After ten years, that probability increases to 97.3%.
It’s no surprise that longer-term investments have a greater probability of being more. Despite this historical data, some are still nervous about investing. But, there is a strategy that can help those who might still be hesitant. Dollar-cost averaging is a strategy in which investments are made in the stock market at regular intervals. With dollar-cost averaging, investments are made regardless of whether the stock market is high or low. The benefit of this strategy is that it helps remove the emotion from investing.
Investing large sums
According to research, around 66% of the time, investments will earn a higher return by investing a large amount of money in a lump sum than if the dollar-cost averaging approach was used. The reason for that is relatively simple. The market generally moves higher, and by investing a lump sum, more of your money would increase when the market moves higher.
When should dollar-cost averaging be utilized for large sums? Some worry about the 34% of the time when they would have less, which makes sense considering the principle of loss aversion. People prefer avoiding losses to acquiring equivalent gains. So what’s a person to do? Since the most crucial aspect of building wealth is investments, dollar-cost averaging can provide many the confidence to invest. For many clients with this strategy, I utilize a tactic investing half as a lump sum and dollar-cost averaging the remainder over the subsequent six to twelve months.
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