What are you waiting for?

2020 written in fireworks

What are you waiting for?

It’s a brand new year and for many comes the realization that they probably had made a large declaration last year about their New Year’s resolution, and how this time was different.  This time they are going to commit to their resolution.  Of course, change is hard, and people rarely fully commit to their New Year’s resolutions.  That’s because they often aren’t necessarily interested in lifestyle change.  If they were, they probably would have already made the changes, regardless of what time of the year it was.  This is why diets or exercise fads rarely work, but long-lasting lifestyle change typically allows people to lose weight and keep it off over the long run.

In personal finance and investing, I often see people making decisions around New Years.  Many people keep putting off things they need to do until the “start of the year”.  Following a budget, saving for retirement, opening an IRA, refinancing the house, and a host of other things fall into this category.  Why do we feel a need to push off major financial decisions until the start of the year?  The reason is simply that change is hard, and it’s easier to overcome the inertia for change by delaying something until tomorrow that should be done today.  But here is the main point of today’s article- waiting is costing you money.  A lot of money.  Particularly when it comes to investing.

Let’s say that you have a good stockpile of cash that you want to invest for long term growth.  You know that you need to let compound interest do its thing, and get that money into the market so you can fund your retirement, or your child’s college education, or maybe even a new house in the future.  The next logical question that people often ask themselves is- when do I invest?  The vast majority of people are terrified of investing and accidentally buying in at the height of the market.  Instead they think “we should wait until the market dips”.  I know people that have been waiting for the market to dip since 2009.  In the meantime, they’ve lost out on doubling or even tripling their money.  The reality is that the stock market is almost always near its all-time high.  The only exception would be during a major recession, or in a smaller correction (about a 10% loss) that tends to happen once or twice every year.

The reality is that “time in the market” is always more important than “timing the market”.  The average investor thinks timing the market is extremely important, when in reality the length of time is what really matters.  This goes for people regardless of their age.  Of course, the older you are, the less exposure you should have to risky assets, but that doesn’t mean you should be constantly waiting for the right moment to switch into risky your assets. 

It’s true that the market is going to go down.  It might even crash the day after you invested your money.  But the reality is that it’s still always the right move to invest as soon as you’re able.  Firstly, nobody can tell you exactly when the next market correction or crash is going to happen.  The best investors in the world can’t tell you, JP Morgan can’t tell you, that guy on YouTube can’t tell you, and your co-worker that thinks they have the market all figured out, definitely can’t tell you.  It will happen at some point, but anyone that tells you they know when it’s going to happen is speculating or just out right lying.  The talking heads on financial media have been calling for a recession since 2011.  If you listened to them and stayed all in cash, you would have cost yourself a lot of money.

So what happens if you’re extremely unlucky and the market crashes shortly after you invested?  You still made the right choice.  It might be tough to watch your assets plummet in value, but think about what’s really happening behind the scenes.  The whole time your assets are moving down in value, you’re accumulating dividends and interest that are getting reinvested back into your account.  Those dividends and interest purchase additional shares just the same in a major recession.  So when the market eventually moves back up, you own more shares than if you had waited until the recession was over.  So not only is there a huge opportunity cost lost for trying to time the market and being wrong, functionally you accumulate more shares and it’s still the right move to invest as early as possible.

Still need more proof?  Portfolio Manager Ben Carlson introduced us to Bob back in 2014.  Bob is the world’s worst investor.  He invested at the peak of the market at the absolutely worst time throughout his whole life.  But guess what?  He still ended up with a huge stockpile of cash for his retirement.