Do you ever feel “the curse” of investing at precisely the wrong point? Like you invested too late, at the wrong time, or maybe you’re just unlucky? Let me introduce you to Bob – the World’s Worst Market Timer.
Bob began his working career in 1970 at age 22 and was a diligent saver and planner. He was smart. He had a plan to save $2,000 a year during the 1970s, then increase his savings by $2,000 each decade. In other words, $2,000 per year in the 70s, $4,000 per year in the 80s, $6,000 per year in the 90s. You get the picture. He also understood the importance of hanging on to his investments long-term, so he would never sell anything once bought.
So, in 1970, Bob invested $2,000. He added $2,000 in ’71 and ’72, then decided to take the plunge and invest in the S&P 500 at the end of 1972. (Even though there were no index funds in 1972, the example is illustrative).
In 1973 – 74, the S&P dropped by nearly 50%. Bob had invested his life savings at the peak, just before it fell in half! Bob was discouraged, as anyone might be, but he had a plan, and he was sticking to it. He systematically saved and never sold his shares.
So Bob kept saving $2,000 per year in the 70s and then $4,000 per year in the 80s. Feeling the sting of his last investment decision, he continued building his cash reserves until the markets rose, and he was feeling confident again. In August 1987, Bob decided to put 15 years of his cash savings to work. Seriously Bob?
This time the market fell more than 30% right after Bob invested. Though Bob was shaken at his investing timing, he did not sell.
After the 1987 crash, Bob was planning to “wait it out.” In the late 1990s, everything in the stock market was on fire. The internet was this unbelievable new technology, and stocks were flying high. By 1999, Bob had accumulated $68,000 in cash from saving each year. A firm believer that the “Y2K” bug was boloney, Bob invested his money in December 1999 just before a 50% decline that lasted until 2002.
His next buy decision in October 2007 would be one more big investment before he would retire. He had saved up $64,000 since 2000, deciding to invest this right before the financial crisis that saw Bob experience another 50% decline. Throwing darts at potential investments would probably have been a better investment strategy.
Distraught, disheartened but determined, Bob continued to save each year and accumulated another $40,000. He kept his investments in the market until he retired at the end of 2013.
So let’s recap: Bob is terrible at investing. His timing caused him to only invest large lump sums at market peaks, just before severe declines. Here are the purchase dates, subsequent declines, and the amounts Bob invested:
Date of Investment
Bob was terrible at timing, but he was actually a pretty good investor. Once he made his investment, he considered it to be a long-term commitment and never sold his shares. He had a consistent savings plan and steel hands. Even the Bear Market of the 70s, Black Monday in 1987, the Tech Bubble, or the Financial Crisis did not cause him to sell or “get out” of the market.
He never sold a single share. So how did he do?
Bob almost fell out of his chair when his advisor told him he was a millionaire! Even though Bob made every single investment at the peak, he still ended up with $1.1 million! Today his value would be $1.8 million (ten times his savings amount).
Even with the worst possible timing, Bob’s behavior as an investor made him successful.
First, Bob had a plan. He was a diligent and consistent saver. He never wavered from his savings plan, and even though he had hesitations about participating in the market, he continued to do it. Second, Bob allowed his investments to compound through the decades, never selling out of the market over his 40+ years of investing and his working career.
Imagine the tremendous psychological toil Bob endured from seeing huge losses accumulate right after he made each investment. But Bob had a long-term perspective and was willing to stick with his savings and investment plan – even if his timing was “a bit off.” He saved and kept his head down.
Certainly you realize Bob is a fictional illustration. It is never wise to only invest in a single strategy, let alone a single investment like an index fund.
Consider this: if Bob had made one small tweak to his investing plan, putting smaller chunks to work each month systematically, he would have ended up with even more money – over $2.3 million in total. But then he wouldn’t have been Bob, the World’s Worst Market Timer.
So, what is learned by this example?
Investing requires an optimistic outlook. Long-term thinking often rewards the optimist. Unless you think the world is coming to an end, it is the optimists who are rewarded.
Temporary short-term declines are part of the deal when you invest. How you react to those price declines will be one of the most significant determinants of your investment performance.
The biggest factor in investment success is savings. How much you save, how early you begin, and how methodically you save have a much bigger impact than investment return.
Get these three things right, along with a disciplined investment strategy, and you should do well.
As the year, and indeed the decade comes to a close, I hope this column has been helpful to you. Ideally, the last ten years have proven prosperous, and if not, I hope you can look to the new decade with fresh eyes and a renewed optimism for smart choices and better behavior about your finances.
Over the next ten years, about 40 million Americans will start planning for retirement. The majority have no plan or strategy for preserving their capital for 30-40 years. Don’t be one of them. Start 2020 with a vision and a plan, and look forward to a bigger future.
This fictional example was created by Ben Carlson at “A Wealth of Common Sense.” It was purely an exercise in the power of long-term thinking and compounding. He used the S&P 500 less a 0.20% expense ratio from 1972 until 1977 when the Vanguard 500 Fund had its first full year. He used the Vanguard 500 Fund from 1977 on so these were actual results from a real fund, not purely hypothetical.
It has been a year for humility as many of the traditional methods of managing risk inside portfolios have been taxed. It has been a year of consciously focusing on gratitude for all that we have and all that has gone well. It also has been a year where the value of our disciplined commitment to planning has never been more highlighted.