2♥ — The Best Time to Start is Now

The best time to start investing is today, because time in the market beats timing the market.

Best Time to Start is Now

This post is part of the MoneyDeck series, a pack of 52 playing cards that describe 52 “golden rules” for Private Investors in the UK.

The best time to start investing is today.

Actually, the best time is 30 years ago, but since we don’t have a De Lorean, we’ll have to settle for today.

The reason for this is one of the three free lunches in investing – stock markets generally go up. ((The other two are the magic of compounding and the benefits that come from diversification ))

As Warren Buffett said:

– In the 20th Century, the United States endured two world wars and other traumatic and expensive military conflicts: the Depression: a dozen or so recessions and financial panics, oil shocks, a flu epidemic and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

The usual way of putting this is that time in the market beats timing the market.

One way to approach this is the “best days” argument. Over the 30 years from 1983 to 2013, the S&P 500 returned 8.4% pa.

  • Thirty years are 11,000 trading days.
  • But if you take away the best ten days, the annual return drops to 5.8%.
  • And if you take away the best 20 days, the returns drop to 4.1%.

Compounded up over 30 years, these changes lead to very different final portfolio values.

Similar calculations for the UK are harder to come by, but I did find one exercise covering the FTSE All Share over the last 15 years:

  • A £1,000 investment would now be worth £2,045.
  • Without the best 10 days, the end value is flat at £1,000.
  • Missing the best 40 days would half the investment.

The consequences of time out of the market are significant.

There’s a similar argument to be made in reverse for trying to avoid the worst few days of your investment career.

The problem is identifying them in advance.

Even ignoring the effects of trading costs to sell and re-buy, private investors have a terrible track record in timing the market.

Those trying to time their entry and exit often miss the bounce. Driven by emotion, private investors regularly sell at the bottom and buy near the top.

So much so that many professionals use private investor moves as contrarian signals.

Sudden market falls – and rises – are much more common than many investors believe.

Falls are what impact people most, for two reasons:

  • the market tends to fall more quickly than it rises (even though it spends much more time rising than falling)
  • people have an asymmetric risk tolerance function, being much more affected by a fall than they are comforted by the equivalent rise

Over short periods, markets are volatile. But the longer you stay invested, the greater the probability that an investment will show a positive return.

Investing in global stocks for 12 years or more has never resulted in a loss over the past 35 years.

To achieve satisfactory returns, investors need to hold risky assets – principally equities.

This in turn requires that they develop a tolerance for risk, at least in so much as price volatility can be described as risk. ((Like Warren Buffett, I prefer a definition of risk based around the probability of long-term loss of purchasing power ))

See also:  10♠ - Don't Lose Money

It’s much more important to focus on the elements of investing that are under your control: asset allocation with regular rebalancing, and costs and taxes.

Staying permanently in the market trades one kind of risk (timing risk) for another (price volatility).

The difference is that one is a zero-sum, 50-50 bet, while the perceived riskiness of price volatility is an illusion – with patience, prices do always recover to new highs.

It’s also worth pointing out that a long-term holder is more likely to benefit from the compounding effect of re-invested dividends.

Dollar cost averaging, or its UK equivalent pound cost averaging, is often held out as a way of taking advantage of market volatility.

But in fact, lump sum investment at the start of the period eventually beats phased investment, even at market peaks.

The logic behind this is fairly simple. Pound cost averaging means that the cost of investment moves closer to the average price during the period of investment.

Since over the long term stock markets rise, eventually this average price will be higher than the price at which a lump sum could be invested at the start of the period.

So regular investment can work well in the short term (up to a few years), but in general, if the money is available, it should be invested immediately.

So invest today, and be confident that things will work out in the long run.

Time in the market is what matters.

Until next time.

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.

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2♥ — The Best Time to Start is Now

by Mike Rawson time to read: 3 min