<THE FOOLISH FOUR>
by Robert Sheard
LEXINGTON, KY. (July 1, 1998) -- As new readers continue to discover the Motley Fool and make the switch from their portfolios of mutual funds to Foolish Four stocks and even more fully Foolish stock portfolios, a common question arises concerning market timing. Shouldn't I wait for a correction to start? Is now the right time? This topic arises every time the stock indices approach or set new highs, so let me reprise a study I wrote about many months ago.
I'm of the opinion that for a genuine long-term investor/saver, that is, someone who adds to his portfolio regularly and stays fully invested always, it makes precious little difference when you invest.
Don't believe me? Let's look at the two opposite poles of market timing.
Back in 1978, you and your neighbor decided that each of you would pony up $5,000 a year and stash it into an Standard & Poor's 500 Index fund. But each of you could decide which day of the year to invest it, as long as it was invested sometime during that year, and all on the same day.
You, unfortunately, had luck so awful that the entire colorful vocabularies of two national navies couldn't describe it adequately. That is, for twenty straight years you invested your $5,000 on the worst possible day, at the highest point for the S&P 500 each year.
Your neighbor, though, had a crystal ball market timers would die for. He managed to pick the lowest possible point for the S&P 500 every single blankety-blank year, the ratsinfratsin creep.
After twenty years, your portfolio grew to $420,606 while Mr. Lucky next door saw his grow to $536,663. But do you know what the difference was in actual annualized returns?
You, the world's worst market timer ever, recorded annualized gains of 12%. Your neighbor? Mr. Hotshot managed a 14% annualized return. That's it??? A lousy two percentage points is the difference between the worst timing every single year and the best?
That's right. That's because it isn't the timing that matters the most. What matters is that both neighbors stayed in the market the whole time and kept adding money regularly. I know, I know, two percentage points compounded over several decades really adds up, but we're talking about the absolute extreme cases of timing the market perfectly or perfectly horribly every single year. Most of us are obviously going to fall in between the two poles in terms of the luck of our entry points, making the difference virtually nonexistent.
But does it matter? With a span of only two percentage points a year, who cares about timing the market as a long-term investor? Invest whenever you're ready, keep adding money regularly, and leave market timing to the gang with blood pressure readings off the scale and direct suppliers of antacids. You have better things to do. Fool on!
[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]
Stock Change Last -------------------- UK + 1/2 53.88 IP + 5/16 43.31 MO +1 1/8 40.50 EK + 1/8 73.19
Day Month Year FOOL-4 +1.05% 1.05% 9.73% DJIA +1.08% 1.08% 14.42% S&P 500 +1.30% 1.30% 18.36% NASDAQ +1.04% 1.04% 21.91% Rec'd # Security In At Now Change 12/31/97 291 Union Carb 42.94 53.88 25.47% 12/31/97 206 Eastman Ko 60.56 73.19 20.85% 12/31/97 289 Int'l Pape 43.13 43.31 0.43% 12/31/97 276 Philip Mor 45.25 40.50 -10.50% Rec'd # Security In At Value Change 12/31/97 291 Union Carb 12494.81 15677.63 $3182.81 12/31/97 206 Eastman Ko 12475.88 15076.63 $2600.75 12/31/97 289 Int'l Pape 12463.13 12517.31 $54.19 12/31/97 276 Philip Mor 12489.00 11178.00 -$1311.00 CASH $415.96 TOTAL $54865.52