The most dangerous decision – when do I invest?

29th November 2015 by Justin Urquhart Stewart

When in the midst of the market noise, cool calm common sense is hard to find. Every so often it is worth reminding ourselves of some important statistics that just underline why it is vital we all invest and not just dither around. Despite those annoying people who claim to be able to time the market, and for the most in fact cannot, the statistics show us quite clearly that the most important part of investing is to be invested.

If you look at a market with good volume and depth, and measure it over a long period of time, then statistics tell the story for themselves. So for example if we look at the S&P 500 over the period from the start of 1995 to the end of 2014, we then have a period of investing covering some 5,036 trading days. During that time if you had invested $10,000 from the start you would have had an annualised return of 9.85% providing you with a perfectly healthy profit of $55,475.13. However if as a result of procrastination on my part, I faffed around and managed to miss just the best 5 days out of 5,036, I would have reduced my profit by 39.73% to just $33,435.75 – a difference of $22,039 for just 5 days!

Let me further exaggerate this by showing you the effect of missing the best 40 days out of that quite extensive period. In fact instead of just making less profit, you actually make a loss and don’t even get all of the original money back, just $9,143.46 or a loss of $856.54.

Now I should reverse the situation. Supposing I had managed to miss the worst days during that time, what would have happened to my $10,000?Well if I had missed the 5 worst days my annualised return would have leapt to 12.24% resulting in my $10,000 giving me a profit of $90,688. Then to balance out the figures, I should also show you the effect of missing the worst 40 days out of 5,036. In this case my annualised return would have risen to 22.19% and my profit would have risen to an astonishing $540,011.

However of course we have no means of knowing when such days are ever going to be and thus unless you are willing to believe the market soothsayers, common sense would tell us that the old market rhyme is still correct -“it’s not timing the market, but it’s time in the market”.

 

So when you look at markets today, and after such a long period of recovery from the financial crisis, it would be very easy to convince yourself to sell out of fear. Whereupon you would promptly find that you missed one of the key positive days that are so vital for longer term returns. Then of course you have the problem of trying to time the entrance back in again. So when is the best time to invest? Well probably now, or even in tranches of “now” – but not later.

 

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