It’s not surprising that investors (especially first-time investors) often worry about the timing of their stock purchases. They believe they can accurately predict when it will rise and fall.
The financial media is obsessed with market timing. Market timing doesn’t work for the average investor – or even most professionals – so don’t listen to the media noise.
Yet this is exactly what investors are doing when they sit tight on their money in cash accounts and money market funds, fretting and worrying and waiting for the right time to buy in.
Is it too late to buy?
There is a common fear of investing at the top of the market – resulting in you staring at big losses right off the bat. Of course, there’s always the possibility of investing right before a market downturn. But no one knows for sure when this will occur.
An acquaintance remarked last year that the market was overheating and a correction was surely due shortly. This was when the S&P/TSX Composite Index was around 12,800. Today (as of this writing) it sits at 15,550. In the meantime he has stayed on the sidelines waiting.
Time is on your side
Over the long term, the compounding returns of a well-chosen investment will add up nicely, whatever the market happens to be doing when you buy.
Related: 5 common mistakes investors make
Benjamin Graham (who taught value investing to Warren Buffett) stated that within a time frame of about 20 years you are more likely to get a solid return in line with true company growth rates.
Rather than fretting about when you should make your move, think instead about how long you’re planning to keep the money in the market.
Stocks are a very attractive option for long-term goals and will generally provide the best return on investment.
Take it in stages
Dollar cost averaging is a well-known strategy for purchasing investments, especially when making regular contributions. What if you have a lump sum sitting in your cash account? You can still spread out your purchases if you want to.
However, a 2012 Vanguard study on dollar cost averaging versus lump sum investing found that over 10-year rolling periods, investing cash in a lump sum was 67% more likely to outperform relative to dollar cost averaging (assuming an investment mix of 60% stocks and 40% bonds).
Is it a good time to buy? Regardless of where the stock market sits, the answer is “Yes!” The key is to start now and contribute as much as you can.
Successful investing relies on analyzing individual companies (or funds), not monitoring the market every day. Look for value, quality, and future prospects.
Make sure you keep your time horizon and asset allocation in mind as well as your personal tolerance for risk.
As John Templeton says, “The best time to invest is when you have the money.”