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Christian Living

Finance

Investment Timing Isn't as Important as You Think

Investment

The long-term stock investor prospers because he owns shares in businesses that participate in the most productive economy in the world.

The important thing is not so much when you buy, but that you buy and continue to buy.

The table below shows the results of two investors' IRA accounts over the past three decades. Each one invested $2,000 a year in an S&P 500 index fund, but they did it differently.

Peter tried to make astute timing decisions, and, as it so happened, turned out to be the world's best timer. Year after year, he invested his $2,000 at the very low for that year.

Paul, on the other hand, didn't try anything fancy. He divided his $2,000 into twelve parts and invested $167 on the last day of every month. The results are shown assuming that dividends are reinvested.

 

Table

Two facts stand out. First, they were both quite successful. True, Peter earned more — about 0.8% per year — but Paul also did very well. It turns out you don't need to have Peter's timing skills (thank goodness!) to see your capital grow handsomely in the market over time.

Which leads to our second observation: being consistent in your dollar commitment is much more important than your timing. While good timing can enhance your returns somewhat, the true engine for capital growth is the steady increase of your ownership stake in American industry month after month. That's why dollar-cost-averaging can be such a powerful tool for the average investor. You don't need to possess great market experience or trading skills to invest successfully; you only need to be tenacious! It takes willpower, not mind power.

The stock market continues to be quite strong despite the doubts raised by the bears that the economy is fragile. In this kind of environment, investors' emotions are often as volatile as the markets. That's why it's important to be sure you're asking the right question. Not questions like: "What's the market going to do next? How high (or low) will it go?" These are the wrong questions because they appeal to a knowledge of coming events which is non-existent. The correct question is: "What does my long-term strategy call for?"

If you've started a dollar-cost-averaging program that calls for you to make monthly investments, then follow through—make your monthly investments as planned. If you have a diversified portfolio in place that reflects the amount of risk suitable for you over the next five years, then relax and look beyond any potential "valley" experiences in the short-term to the next "mountaintop" in the years that follow. The goal is to make "inside-out" decisions, ones based on your personal strategy (which you know) rather than on any speculation as to what the markets may do over the coming 6-12 months (which you will never know).

 

 

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