As the stock market continues to reach new highs, it’s tempting to think about the possibility of buying and selling at just the right moment.

Here’s a dirty little secret that most of the investment industry doesn’t want you to know: Time is more important than timing in investment success.

Listen now and learn:

  • The impact of investing at the absolute worst times
  • The difference in returns earned from different timing strategies
  • The secret to timing the market



As the stock market continues to reach new highs, it’s tempting to think about the possibility of buying and selling at just the right moment.

Here’s a dirty little secret that most of the investment industry doesn’t want you to know: Time is more important than timing in investment success.

A good example of this comes from an analysis described by a famous mutual fund manager Peter Lynch on the effects of market timing on performance over a 30-year period from 1965 to 1995.

If you had invested $1,000 on the lowest day in the market of each and every year, you would have earned an average annual return of 11.7%. On the flip side, if you had invested at the market high of each year, your return would have been 10.6%. Finally, if you had simply invested $1,000 at the start of every year, you would have earned 11.0% per year.

Let’s recap the findings:

  • Perfect market timing return = 11.7%
  • Worst market timing return = 10.6%
  • No market timing return = 11.0%

There are a few takeaways from this simple study of market timing. 

  1. First, the reward for perfect market timing is very small considering it’s impossible to consistently time market movements over long periods of time. 
  1. Second, the average returns were achieved because the investor – whether he/she had good or bad market timing – never sold in down markets and allowed returns to compound over time.
  • These returns weren’t achieved because the investor side-stepped the many downturns that occurred during the period. 
  • The average returns include both the really good times and the really bad times.

In one of my all-time favorite blog posts, Ben Carlson performs a similar analysis in which an investor only invests at the market peaks, but never sells.

I’m going to try and summarize Ben’s analysis as best I can, but I’ll provide a link in the show notes too.

So Ben creates this narrative around Bob, who is a good saver, but only has the courage to invest his savings when the market was doing well, which just so happen to coincide with market peaks. And I think that’s really every investor’s worst nightmare: investing a bunch of cash at a market peak.

So Bob starts his career in 1970 at age 22 and saves $2,000 a year during the 1970s and increases his annual savings by $2,000 every decade as his salary rises. This means he saves $4,000 per year in the 1980s, $6,000 per year in the 1990s, $8,000 per year in the 2000s, and $10,000 per year in the 2010s until retiring in 2013.

But remember, he only invests at market peaks, the first of which comes at the end of 1972 after he has accumulated $6,000 in cash at the bank. Unfortunately, the market proceeded to lose half of its value in 1973 and 1974. 

Bob never sells his investments, but he’s too nervous to add additional funds to the market and directed his savings into cash at his bank. 

It isn’t until August 1987 that Bob feels good about the market again. He has now accumulated $46,000 in savings at the bank. Again, he invested that money into the S&P 500 and, again, he watches the market crash. Fortunately, Bob never sells any of his purchased shares, but he reverts back to saving into his cash account at the bank.

The next time Bob felt the future looked bright was December 1999, at which point he had $68,000 of cash savings to invest. His purchase in December 1999 was followed by a 50 percent downturn that lasted until 2002. 

Again, Bob never sold, but he also made his annual savings to a cash account until his final investment of $64,000 in October 2007. 

True to form, he invested at the market peak and watched the S&P 500 fall over 50 percent. He was planning to retire in 2013, so he never made another stock market investment and directed his remaining years of savings to his trusty cash account.

Despite the awful market timing, Bob ends up with $1.1M dollars at retirement, which is pretty good given that he only saved $184k and always invested at the absolute worst times.

Although Bob consistently invested at the top of the market, he had two things going for him. 

First, he never sold his investments despite the market routinely crashing throughout his career. 

That was true of the Peter Lynch study, too

  • Even though Wall Street would like you to believe that investment success requires a complex strategy, it is time and the power of compounding that are the biggest drivers of building wealth through investments.
  • It’s easy to come up with reasons why the market might crash, but it is important to remember that stock investors are compensated for assuming the uncertainty of short to intermediate stock returns. 
  • In order to receive a rational premium for owning stocks over bonds and cash, stocks occasionally need to lose value.

If you stay invested through all market environments and time will reward you for your patience.

The second thing worth noting in the Bob The World’s Worst Market TImer’s scenario is that Bob’s consistent savings played a huge role in him accumulating $1.1 million by retirement. If Wall Street’s biggest secret is that time trumps timing, then the secret that comes in at a close second is your savings rate is more important than your rate of return. 

The beauty of this secret is that your savings rate is something you control. 

I’d like to highlight one final study, this one’s a little more recent and may now be my favorite. Charles Schwab published an article titled “Does Market Timing Work?” that shows the cost of waiting for the perfect moment to invest can be a costly one. 

If you’re a regular reader of mine, you that I believe it’s far better to plan for the unknown future than it is to try and predict it. This research, which I’ll link to in the show notes, is another great illustration in the importance of developing a plan and investing accordingly.

The research looks at hypothetical performance for five different investors over a 20 year period ending in 2020. 

Each hypothetical investor receives $2,000 at the start of each year. 

  • The first investor has perfect market timing such that the $2,000 is invested at the low point for the S&P 500 of each calendar year. 
  • The second investor immediately invests their $2,000 on the first trading day of the year. 
  • The third investor uses dollar cost averaging, by dividing the annual $2,000 allotment into 12 equal portions, which are invested at the beginning of each month. 
  • The fourth investor has perfectly bad timing, meaning the $2,000 is invested each year at the highest closing level for the S&P 500. 
  • The final investor leaves their money in cash and waits for a better opportunity to invest, always convinced that lower stock prices are just around the corner.

Naturally, the best results belonged to the investor that is a perfect market timer, which finishes with $151,391. 

  • But that perfect outcome wasn’t much better than the next best performer which was the investor who immediately invested the $2,000 on the first trading day of each year.
  • In fact perfect market timing over a 20 year period only resulted in $15,920 more than investing immediately. 
  • And for what it’s worth, the next best performer was dollar cost averaging, which trailed the immediate investor by just $615. 

As you would expect, the investor with perfectly bad market timing – the one that always invested at annual market peaks – trailed the perfect market timer, the immediate investor, and the dollar cost average.

  • But the most important takeaway is that the investor with the absolute worst market timing ended up with nearly three times as much as the investor that stayed put in cash.

Now, maybe you think the data is cherry picked or that it’s time period dependent, but that’s not so.

  • The researchers at Charles Schwab ranked these different investment strategies over 76 rolling 20-year periods going back to 1926.
  • And the rankings were identical in 66 of those 76 rolling periods.

For those other 10 periods where the rankings were different:

  • Investing immediately never came in last place. 
  • It was in 2nd place 4 times, third place five times, and fourth place only once (from 1962 to 1981 – one of the few periods of persistently weak equity market returns).
  • And, fwiw, the 2nd, 3rd, and 4th place returns were virtually tied.

But the research doesn’t stop there:

  • Looking at all possible 30, 40 and 50-year time periods starting in 1926, there is only a few instances where investing immediately isn’t the 2nd best outcome to perfect market timing. And in those very few instances it wasn’t, dollar cost averaging was the best outcome.
  • In all iterations and time periods from this research, never buying stocks was always the worse outcome.

So I’ll leave you with a few takeaways from this study: 

For starters, if you’re tempted to wait for the best time to invest in the stock market, the benefits of doing so (assuming it were even possible to time it correctly) aren’t very impressive. Remember that the perfect market timer in this study finished with $151,391 compared to the investor that immediately invested each year and finished with $135,471.

Knowing that it’s nearly impossible to accurately identify market bottoms on a regular basis, the extra $15,920 isn’t that much additional reward for assuming the very high likelihood that you will time the market incorrectly.

So if you’re sitting on cash waiting for the right time to invest, the evidence suggests that best course of action is to develop a plan that allows you to take action as soon as possible. 

Developing a plan helps prevent procrastination, minimize regret, and avoid market timing. Even the worst luck with your investment timing isn’t as bad as the high cost of waiting to invest.

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About the Podcast

Long term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence. 

Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.

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