If you have money to invest, what’s keeping you from realising higher gains? Probably time.
You build wealth through investing by keeping your money in the market. Take it out too early, and you risk losing out on a significant amount of money over the course of your life. As James Royal writes for NerdWallet, “your length of ‘time in the market’ is the best predictor of your total performance.” Here’s why.
(Note: That doesn’t mean “timing the market,” as in trying to bet when the best time to buy and sell is. In fact, that’s a terrible way to try to make money, and you’ll probably always lose.)
The S&P 500 has historically returned around 10 per cent annually not including dividends, but that doesn’t mean you can invest one day and then cash out a year later and expect 10 per cent more money. You need to stay in the market. Royal writes,
Over the 15 years through 2017, the market returned 9.9 per cent annually to those who remained fully invested, according to Putnam Investments. However:
- If you miss just the 10 best days in that period, your annual return drops to five per cent.
- If you miss the 20 best days, your annual return drops to two per cent.
- If you miss the 30 best days, you actually lose money (-0.4 per cent annually).
You can’t “time” the market to hit just the best days. You’re riding out volatility, and you’re benefitting from compounding returns and dividends. There’s a reason everyone tells you to start early: The sooner you do, the more money you’re likely to end up with. You have time on your side.
So, why do people miss out on the gains? As Royal notes, it comes down to fear and greed. Fear is more or less not understanding the market – if, say, you were born in the mid-1980s and watched everything collapse as you were leaving college in 2008, you’re probably reluctant to throw everything into the market. But waiting for stocks to start climbing – when the market is “safe” – is a terrible idea. There’s no ideal time to invest, except a long time.
Greed is wanting things to be more interesting, to beat the earnings of “average” investors. Because none of us want to think we’re average, right? But as I’ve written before, the building blocks of your finances should be boring: Invest in low-cost index funds, consistently, for a long time. If you want to invest in individual companies, do your research first, and consider how the company will be doing in 10 or 20 (or more) years.
Nothing is guaranteed, but investing for the long run – so that the market has time to dip and recover, as it always has – is going to be the best strategy for most people.