Home Run Investing

Can you time the market? Trying to do so is about like trying to time your swing against a Nolan Ryan fastball. In the entirety of his career, Nolan Ryan’s 100+ mph heater held opponents to a .204 batting average and struck out more batters than any pitcher in baseball history. Sure some guys hit some home runs or some game winners against him, but over a 27-year career barely 20% of the batters he faced got a hit.

Nolan Ryan
At 42 Nolan Ryan was still throwing 102mph…

Juxtapose that against your investing timeline, which will probably run 27 years or so. If you try to time the market you’ll be pretty damn lucky to be right 20% of the time. Instead of walking back to the dugout to prepare for your next at bat however, that type of success rate in investing will leave you broke to the point you won’t be able to afford a bat in the first place.

Don’t Fear The Market:

I have a friend who is constantly wanting to invest, yet he is constantly fearful of investing. He’s simply scared of being wrong and losing money. When the S&P 500 started sliding off a high of 2126.00 in 2015 he got out of the market, thinking the bull market that began in 2009 was over. Of course there were many pundits around that same time pontificating the same thing.

The S&P 500 did indeed fall to 1880.00 or so during 2015 and my buddy felt good about his decision until you talk to him today as the S&P 500 sits at a record high of 2497.00. Now he’s frozen out of the market! He’s missed a 15% gain, missed out on a 2% per year dividend, and is left guessing at when he should get back in. As his nest egg sits in cash he’s losing his assets to inflation instead of compounding growth and reinvesting dividends in the market.

bull market
This is the bull market we are in today!

To add insult to injury, his portfolio will never catch up. He will lag benchmark returns over the same timeframe as his investment horizon from here on out. He stepped up to the plate, got afraid to swing, and the market ran 3 fastballs right down the middle.

You Gotta Get in the Batter’s Box:

I have another friend extremely interested in Bitcoin. When BTC was at $800 I told him I thought it was a good buy and laid out several catalysts I saw that would increase its value (the “halving” for miners, the Winklevoss ETF, China legalization, etc.). When Bitcoin crossed $1,000 he declared (with no real reasoning other than an arbitrary price target) that he had missed his window and would not be investing in Bitcoin.

bitcoin
$1,000? You missed it…

Obviously Bitcoin remains a very speculative investment, and many pundits at the time were pontificating $1,000 as a crazy price to pay for a Bitcoin. Today as BTC pushes up against $4,000 my buddy is slinking back to the dugout, dragging his bat in the dirt and wondering why he never swung at a pitch. He’s missed out on a 4x gainer – that’s the investing equivalent of hitting a 104mph Nolan Ryan fastball out of the ballpark!

A Strategy:

So how do you improve your batting average, avoid the strikeout, and hit the home runs? It’s easy – you invest! You buy quality assets, you diversify broadly, and you invest for the long term. It’s that easy. You step in the batter’s box and you swing! You can’t let fear cripple or compel you.

The markets are going to rise and fall, that’s a given. It’s also a given that there is never a perfect time to invest; however, given a long enough timeline with a quality asset there is never bad time to invest either.

The Worst Investor in the World

Let’s say I’m the worst (or possibly the most unlucky) investor on the planet and I pick the 2 worse trading days over the past 20 years to invest – the market peak going into the dotcom bubble and the market peak going into the housing bubble. Am I toast? Did I strikeout? Not at all…

dotcom and real estate bubble chart
chart by MauiPeterB @ http://financialreckoningday.blogspot.com

If you look back to the market peak heading into the dotcom bubble bursting in 2000 and I drop that $10,000 in the stock market on that peak day 17 years ago, it would be worth 42% more than a cash equivalent today.

Shorten the scenario and rewind back to 2007. Let’s say I drop that $10,000 into the market at its peak that year, right before the housing bubble burst to begin The Great Recession. Yes, the market took a brutal and bruising hit between then and now but my $10,000 in stocks would exceed a $10,000 cash equivalent by 54% today.

Go back a full 25 years and let’s say I drop $10,000 into the market on its peak trading day of 1992. My investment would exceed a cash equivalent by a whopping 381% today.

Dollar-Cost Averaging

The scenarios above, though they worked out in the long run, are not the most prudent way to invest. There is a strategy you can use to help you smooth out the ups and downs of the market and even use them to your advantage…

Dollar-cost averaging (DCA) is an extremely effective wealth-building strategy that means investing a fixed amount of money at regular intervals over a long period. When the market dips you ensure yourself buys all the way down and all the way back up again. When stocks are expensive you buy fewer shares and when they are cheap you buy more shares.

You can also remove emotion, market events, news events, etc. out of the equation as you will be investing without really even thinking about it. Sure you’ll have buys at the peaks, but you’ll also have buys at the bottoms of the trough as well. Over the long run your batting average is going to be astronomically better than if you’d tried to time the market with strategically placed periodic buys.

Don’t Miss Out:

The alternative? Saving up your money in cash and then timing the market? It’s just a bad idea. If you slice up the market history into 20 year segments and subtract the 10 best trading days in each 20 year segment, missing those trading days cuts your investment gain by over 3%/year versus dollar-cost averaging and staying in the market across the same 20 year span.

Also, a majority of those best trading days occur within 2 weeks of the worst days – that’s a time when you’ll be frozen in fear if you’re watching and trying base your decisions on timing. Furthermore, you’re going to be tempted to use that cash for other things before you can get it invested in the market.

 

Remember, the most important aspect of investing is time, not timing. Trying to jump in and out of the market based on what you think it may or may not do is a really bad idea. Get in, stay in, and keeping contributing regularly. That’s how you’ll hit some investing home runs.

Advantages of DCA:

  1. History is on your side. We’ve never seen a 20-year period where the S&P 500 did not generate a positive return. This is not a get rich quick method of investing to be sure, but you’re almost guaranteed wealth provided your investing timeframe is long enough and you stay committed to regular contributions that are adequately sized to meet your investing goal within your timeframe. The worst 20 year period saw returns of 3%/year while the best 20 year segment generated 18%/year with the average at 11.11%/year.
  2. Downside protection. By investing in an S&P 500 index fund you will be well-diversified with almost no chance of being totally wiped out. It would take all of America to go to zero to see your investments follow suit. Furthermore, the average recovery of the S&P 500 (Based on a peak-to-trough decline of at least 20%) is only 2 years, with the longest recovery taking 69 months (1973) and the shortest taking 3 months (1980). The Great Recession of 2007-2009 saw a 65 month recovery to regain the 57% dip. If you stayed the course with your DCA’ing through that dip, then your investments at the low point of that recession have tripled as of today (see chart above)! Those are some grand slams!
  3. Easy Money. No need to sweat, lose sleep, get wrapped up in your emotions, or study to become and MBA, CPA, or CFP – those suffixes are too expensive for my money anyway. On average you’ll need to invest $300/week in the S&P 500 to become a millionaire in 20 years or $100/week to join the millionaire club in 30 years. Get after it!

Real Life:

I dollar-cost average like a mad man. I make buys in the market each and every week with money going out of my checking account or my paycheck and into broadly diversified stock & bond ETFs.

While I do love to pay attention to the news, market events, market sentiment, etc. I do not let it alter my strategy of DCA’ing on weekly basis. The only thing I may tweak is my target investment. For instance, with the stock indexes running wild recently (the DOW, S&P 500, and NASDAQ all topped fresh highs as I am typing) I have seen my allocation toward stocks run away and it’s been difficult to pull back. Therefore, I have moved all of my weekly money in my DCA strategy into my bond funds in an effort to get closer to my preferred 80/20 or maybe a 70/30 allocation. Once I get re-allocated, I can then move some weekly investments back into stocks to stay at the ratio I desire.

Keep investing. Keep swinging. Hit home runs!

 

 

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