[Investing] Why you shouldn’t “guess when to enter the market”

Most investors want to speculate on the timing of entering the market so that they can buy low and sell high, and get the maximum return possible on their investment. However, in reality no one can predict the best time to invest. While history doesn’t reflect when good times are right to enter the market, it does show that no matter what turbulence financial markets experience, there is always a moment of recovery. Being able to ride out short-term fluctuations and stay invested for the long term will often give you positive returns in the long run.

Investors who try to time the market generally hope to achieve excess returns by looking for the lowest or highest point in the market cycle. On the other hand, investors who choose to “stay in the market” focus on investment fundamentals and hold for the long term. If you are looking to invest rather than speculate, you should avoid trying to time the market!

“Staying in the market” is more important than “guessing the timing of entering the market”: the power of compound interest

Chart 1 shows the performance of a $1,000 investment in Global stocks at low or high levels each month since January 2004. Whether you enter the market at monthly lows or highs, there is no significant difference in the final value.

In Chart 2, the black line represents an investor who waited for the market to fall significantly before investing. Although this investor had perfect timing and entered the market not only at market lows each month but also during market crashes, when stock values ​​were at particularly low levels, the ultimate return was much worse. Starting earlier (red line) means investing an additional $48,000 over that period, creating an additional $165,000 in value using the power of compound interest.

If your goal is to grow your wealth over an extended period of time, it’s often more important to start investing early than if you enter the market at a low or high point in the financial markets. The longer the investment period, the greater the compounding or snowball effect. Reinvesting investment returns allows your principal and returns to continue to grow.

Additionally, if you try to time your trades, you risk missing some of the best performing days, and even if you miss just a few days, your returns will be drastically different. Exhibit 3 shows that a $100,000 stock investment since 2005, missing the market’s best 20 days, reduced the final investment value from approximately $410,000 to $146,000.

If you are concerned about investing in one lump sum, you can invest in regular installments. Regular investing helps eliminate the impact and fear of market fluctuations. When prices are lower, more shares are purchased, and when prices are higher, fewer shares are purchased. This approach can help you stick to your investment plan by reducing the impact of short-term market fluctuations on your portfolio.