Trying to navigate the peaks and valleys of market returns, investors seem to naturally want to jump in at the lows and cash out at the highs. But no one can predict when those will occur. Of course we’d all like to avoid declines. The anxiety that keeps investors on the sidelines may save them that pain, but it may ensure they’ll miss the gain. Historically, each downturn has been followed by an eventual upswing, although there is no guarantee that will always happen. Trying to avoid risk could itself be risky, since it’s impossible to know when to get back in.
The chart below shows two hypothetical investments in the S&P 500 over the 20-year period ending December 31, 2018. Each investor contributed $10,000 every year. One investor somehow managed to pick the very best day (the market low) of each year to invest. The average annual return on that investment would have been 9.16%. The other investor was not so lucky and actually picked the worst day (market high) each year. Even with the worst investment timing, the average annual return would have been 6.91%. At the end of 20 years, the cumulative investment of $200,000 had a value of $415,560.
So even selecting the worst day each year to invest, someone who continued investing in the market over the past 20 years would have come out ahead. It’s important to note that regular investing neither ensures a profit or protects against a loss. However, the tables below illustrate how regular investing can be beneficial.
Timing isn’t critical to long-term success: