Mark Riepe, Senior Vice President, Schwab Center for Financial
Research
Imagine for a moment that you’ve just received a year-end bonus or
income tax refund. You’re not sure whether to invest now or wait. After
all, the market recently hit an all-time high. Now imagine that you face
this kind of decision every year — sometimes in up markets, other times
in downdrafts. What’s a good rule of thumb to follow?
Our research definitively shows that the cost of waiting for the
perfect moment to invest far exceeds the benefit of even perfect timing.
And because timing the market perfectly is, well, about as likely as
winning the lottery, the best strategy for most of us mere mortal
investors is
not to try to market-time at all. Instead,
make a plan and invest as soon as possible.
FIVE INVESTING STYLES
But don’t take my word for it. Consider our research on the performance
of five long-term investors following very different investment
strategies. Each received $2,000 at the beginning of every year for the
20 years ending in 2006 and left the money in the market once
invested.(1) Check out how they fared:
1. PETER PERFECT was a perfect market timer. He had incredible skill
(or luck) and was able to place his $2,000 into the market every year at
the lowest monthly close.
For example, Peter had $2,000 to invest at the start of 1987. Rather
than putting it immediately into the market, he waited and invested
after month-end November 1987 — that year’s monthly low point for the
S&P 500® Index (a proxy for the stock market).
At the beginning of 1988, Peter received another $2,000. He waited
and invested the money after January 1988, the monthly low point for the
market for that year. He continued to time his investments perfectly
every year through 2006.
2. ASHLEY ACTION took a simple, consistent approach: Each year, once
she received her cash, she invested her $2,000 in the market at the
earliest possible moment.
3. MATTHEW MONTHLY divided his annual $2,000 allotment into 12 equal
portions,which he invested at the beginning of each month. This strategy
is known as dollar cost averaging. You may already be doing this
through regular investments in your 401(k) plan or an Automatic
Investment Plan (AIP), which allows you to deposit money into mutual
funds on a set timetable.
4. ROSIE ROTTEN had incredibly poor timing — or perhaps terribly bad
luck: She invested her $2,000 each year at the market’s peak, in stark
defiance of the investing maxim to “buy low.” For example, Rosie
invested her first $2,000 at the end of August 1987 — that year’s
monthly high point for the S&P 500. She received her second $2,000
at the beginning of 1988 and invested it at the end of December 1988,
the peak for that year.
5. LARRY LINGER left his money in cash (using Treasury bills as a
proxy) every year and never got around to investing in stocks at all. He
was always convinced that lower stock prices — and, therefore, better
opportunities to invest his money — were just around the corner.
THE RESULTS ARE IN: INVESTING IMMEDIATELY PAID OFF
We looked at how much wealth each of the five investors had
accumulated at the end of the 20 years (1987–2006). Actually, we looked
at 62 separate 20-year periods in all, finding similar results across
almost all time periods.
Naturally, the best results belonged to Peter, who waited and timed
his annual investment perfectly: He accumulated $146,761. But the
study’s most stunning findings concern Ashley, who came in second with
$141,856 — only $4,905 less than Peter Perfect. This relatively small
difference is especially surprising considering that Ashley had simply
put her money to work as soon as she received it each year — without any
pretense of market timing.
Matthew’s dollar-cost-averaging approach delivered solid returns,
earning him third place with $134,625 at the end of 20 years. That
didn’t surprise us. After all, in a typical 12-month period, the market
has risen 75 percent of the time.(2) So Ashley’s pattern of investing
first thing did, over time, yield lower buying prices than Matthew’s
monthly discipline and, thus, higher ending wealth.
Rosie Rotten’s results also proved surprisingly encouraging. While
her poor timing left her about $18,262 short of Ashley (who didn’t try
timing investments), Rosie still earned significantly more than double
what she would have if she hadn’t invested in the market at all.
And what of Larry Linger, the procrastinator who kept waiting for a
better opportunity to buy stocks — and then didn’t buy at all? He fared
worst of all, with only $61,622. His biggest worry had been investing at
a market high. Ironically, had he done that each year, he would have
still earned more than twice as much over the 20-year period.
THE RULES DON’T CHANGE OVER TIME
Regardless of the time period considered, the rankings turn out to be
remarkably similar. We analyzed all 62 rolling 20-year periods dating
back to 1926 (e.g., 1926–1945, 1927–1946, etc.). In 52 of the 62
periods, the rankings were exactly the same; that is, Peter Perfect was
first, Ashley Action second, Matthew Monthly third, Rosie Rotten fourth
and Larry Linger last.
But what about the 10 periods when the results were not as expected,
as illustrated in the table? Even in these periods, investing
immediately never came in last. It was in its normal second place four
times, third place five times and fourth place only once, from 1962 to
1981, one of the few periods of persistently weak equity markets. What’s
more, during that period, fourth, third and second places were
virtually tied.
We also looked at all possible 30-, 40- and 50-year time periods,
starting in 1926. If you don’t count the few instances when investing
immediately swapped places with dollar cost averaging, all of these time
periods followed the same pattern. In every 30-, 40- and 50-year
period, perfect timing was first, followed by investing immediately or
dollar cost averaging, bad timing and, finally, never buying stocks.
WHAT THIS MEANS FOR INVESTORS: DON’T WAIT
If you make an annual investment (such as a contribution to an IRA or
to a child’s 529 plan), and you’re not sure whether to invest in
January of each year, wait for a “better” time, or dribble your
investment out evenly over the year, be decisive. The best course of
action for most of us is to create an appropriate plan and take action
on that plan as soon as possible. It’s nearly impossible to accurately
identify market bottoms on a regular basis. So, realistically, the best
action that a long-term investor can take, based on our study, is
to
invest at the first possible moment, regardless of the current level of
the stock market.
If you’re tempted to try to wait for the best time to invest in the
stock market, our study suggests that the benefits of doing this aren’t
all that impressive — even for perfect timers. Remember, over 20 years,
Peter Perfect amassed less than $5,000 more than the investor who put
her cash to work right away.
Even badly timed stock market investments were much better than no
stock market investments at all. Our study suggests that
investors
who procrastinate are likely to miss out on the stock market’s potential
growth. By perpetually waiting for the “right time,” Larry
sacrificed $61,972 compared to even the worst market timer, who invested
in the market at each year’s high.
CONSIDER DOLLAR COST AVERAGING AS A COMPROMISE
If you don’t have the opportunity, or stomach, to invest your lump
sum all at once, consider investing smaller amounts more frequently.
Dollar cost averaging has several benefits:
*
PREVENTS PROCRASTINATION. Some of us just have a
hard time getting started. We know we should be investing, but we never
quite get around to it. Much like a regular 401(k) payroll deduction,
dollar cost averaging helps force yourself to invest consistently.
*
MINIMIZES REGRET. Even the most even-tempered
stock trader feels at least a tinge of regret when an investment proves
to be poorly timed. Worse, such regret may cause you to disrupt your
investment strategy in an attempt to make up for your setback. Dollar
cost averaging can minimize this regret because you make multiple
investments, none of them particularly large.
*
AVOIDS MARKET TIMING. Dollar cost averaging
ensures that you will participate in the stock market regardless of
current conditions. While this will not guarantee a profit or protect
against a loss in a declining market, it will eliminate the temptation
to try market-timing strategies that rarely succeed.
As you strive to reach your financial goals, keep these research
findings in mind. It may be tempting to try to wait for the “best time”
to invest — especially in a volatile market environment. But before you
do, remember the high cost of waiting. Even the worst possible market
timers beat not investing in the stock market at all.
Caranya bukanlah cara cepat kaya, tetapi cara pasti kaya.
Hendak tahu apakah caranya? Izinkan saya jelaskan dengan satu gambaran…
) He deserved this promotion as he is
very persistent and tak pernah give up dalam bisnes ni.