(Performance difference = 1.6% difference)
Investment returns from 1970 to 1995
Starting in 1970, if you were unlucky and invested $2,000 at the peak day of the market in each successive year, your annual return was 8.5%.
If you timed the market perfectly and invested your $2,000 at the low point in the market in each successive year, your annual return was 10.1%.
So the difference between great timing and lousy timing is 1.6%.
Of course, you'd like to be lucky and make that extra 1.1%, but you'll do just fine with lousy timing, as long as you stay invested in stocks. Buy shaes in good companies and hold on to them through thick and thin.
There's an easy solution to the problem of bear markets. Set up a schedule of buying stocks or stock mutual funds so you're putting in a small amount of money every month, or four months, or six months. This will remove you from the drama of the bulls and bears.
Missing the chance to run with the bulls
One of the worst mistakes you can make is to switch into and out of stocks or stock mutual funds, hoping to avoid the upcoming correction. It's also a mistake to sit on your cash and wait for the upcoming correction before you invest in stocks. In trying to time the market to sidestep the bears, people often miss out on the chance to run with the bulls.
A review of the S&P 500 going back to 1954 shows how expensive it is to be out of stocks during the short stretches when they make their biggest jumps.
- If you kept all your money in stocks throughout these four decades, your annual return on investment was 11.5%.
- Yet if you were out of stocks for the fourty most profitable months during these fourty years, your return on investment dropped to 2.7%..
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