Did you invest some money on Jan. 26th? Do you ever feel “the curse” of investing at exactly the wrong point? Like your investing is too late, at the wrong time, or maybe that you’re just unlucky?
Well meet Bob – the World’s Worst Market Timer. Bob began his working career in 1970 at age 22 and was a diligent saver and planner.
His plan was to save $2,000 a year during the 1970’s, then increase his savings by $2,000 each decade. In other words $2,000/year in the 70’s, $4,000/yr in the 80’s, $6,000/year in the 90’s… you get the picture.
Bob started in 1970 with $2,000, 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. (Time out:there were no index funds in 1972, but come along with me for illustration purposes).
Now 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 bummed, but Bob had a plan and he was sticking to it. You see Bob never sold his shares. He didn’t want to be wrong twice by investing at the peak and then selling when prices were low. Smart move Bob!
So Bob kept saving $2k/year in the 70’s and then $4k/yr in the 80’s. But he was feeling the sting of his last investment and did not feel comfortable adding to his fund until he had seen the markets rise a fair amount. In August of 1987 Bob decided to put 15 years of his savings to work. Seriously Bob?
This time the market fell more than 30% right after Bob invested. Bob, amazed at his investing prowess, did not sell.
After the 1987 crash, Bob was really planning to wait it out. In the late 1990s everything was on fire. The internet was unbelievable new technology and stocks were flying high. By 1999 Bob had accumulated $68,000 from saving each year. A firm believer that the Y2K bug was boloney, Bob invested his cash in December 1999 just before a 50% decline that lasted until 2002.
The 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. Monkey’s throwing darts were probably better at investing than Bob.
Distraught and disheartened, Bob continued to save each year and accumulated another $40k. He kept his investments in the market until he retired at the end of 2013.
So let’s recap: Bob is definitely has “bad timing”, only investing at market peaks just before severe market declines. Here are the purchase dates, subsequent declines and the amounts Bob invested:
Date of Investment
Fortunately Bob was a good saver, and actually a good investor. You see once he made his investment he considered it to be a long-term commitment and never sold his shares. Even the Bear Market of the 70’s, 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 $1.1M! How you might ask? Bob actually had what we would call “Good Investor Behavior”.
First, Bob was a diligent and consistent saver. He never waivered from his savings plan (recall $2k/year in the 70’s, $4k in the 80’s, $6k in the 90’s, $8k in the 2000’s, $10k in the 2010’s until his retirement in 2013 at age 65).
Second, Bob allowed his investments to compound through the decades, never selling out of the market over his +40 years of investing – his working career.
During that time Bob endured tremendous psychological toil 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 an illustration. We would never advise only investing in a single strategy, let alone a single investment like an index fund. If Bob had invested systematically, the same amount each month, increasing his savings like he did he would have ended up with even more money, (over $2.3M) – but that would not have been Bob, the Worlds Worst Market Timer.
So what are the lessons?
If you are going to invest, invest with an optimistic outlook. Long-Term thinking often rewards the optimist. Unless you think the world is coming to an end, optimists are typically rewarded.
Temporary, short-term losses are part of the deal when you invest. How you react to those losses will be one of the biggest determinants of your investment performance.
The biggest factor in investment success is savings. How much you save, and how methodically you save has a much bigger impact than investment return.
Get these three things right along with a disciplined investment strategy and you should do well. Even Bob did well. Nice work Bob.
Assumptions and disclaimers: This is fictional example 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 the 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.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
All market indexes discussed are unmanaged and are not illustrative of any particular investment. Indexes do not incur management fees, costs and expenses, and cannot be invested into directly.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Investing involves risks, including possible loss of principal.
No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
After almost 45 years as a financial advisor, one realizes that there’s truth behind the phrase, “Reality is made up of circles, but we see straight lines.” Market cycles, crises, and investor behavior are all echoes of things we’ve seen in the past and will likely experience again in the future. No doubt the COVID-19 crisis impacts us all, and while it may feel like something completely new, it really isn’t.