People who are worried about investing at a time when the stock market is making new highs should consider this: Regularly investing a small amount of money -- even if you start at the worst times -- has historically worked out quite well.
The beauty is in the simplicity. By regularly buying stocks, both at high and low prices, the returns over time work out to rather impressive results.
Don't believe me?
Let's go back to March 2000, when the S&P 500 would hit its then-all-time high during the tech bubble. Microsoft was selling for more than 70 times earnings. Even boring businesses like Coca-Cola were trading for more than 50 times earnings.
Regular investing turns small amounts of money into large piles of cash. Image source: Getty Images.
It was a wonderful time for people who were selling stock they had accumulated decades before, but a terrible time for people who were just getting started. In hindsight, stocks were expensive -- too expensive -- and buying then would have been a mistake.
But was it really a mistake? Running the numbers reveals that someone who started investing with a $100 investment in an S&P 500 index fund and continued to invest $100 per month thereafter would have actually ended up with a fairly impressive return of about 8.9% per year.
|
Total Investment |
What It's Worth Now |
Annual Return |
|---|---|---|
|
$21,300 |
$49,916 |
8.9% |
Data source: S&P 500 return calculator.
An 8.9% return isn't necessarily spectacular -- since 1927, the S&P 500 has returned 10%, on average -- but it is far better than what you would have earned keeping your cash in a bank account. And remember, this is a return earned from a period that starts at one of the worst possible times to invest.
Put in nominal terms, you'd have gains of about $28,616. And best of all, you would have earned this money with no real work. The median worker would have to work about eight months to earn the same $28,616, and that's before taxes.
The hardest part is waiting
If you had started investing in March 2000, you would have seen some incredible ups and downs. Your initial investment in 2000 would have nearly halved in value by late 2002, and wouldn't break even until years later.
And just as your earliest investments made their way back to breakeven, the stock market was nearing another peak, only to plummet yet again as the housing boom turned to bust. The S&P 500 lost nearly half its value in short order, as the world's largest financial institutions were filing for bankruptcy left and right in 2008.
Image source: Author, data from DQYDJ.com.
But those who ignored every instinct to sell, and instead made regular monthly investments, got the advantage of buying stocks at low prices, which only served to add to their long-run returns today.
In many ways, the most important skill any investor can have is the ability to ignore their portfolio. When Fidelity did a study of its own clients' accounts, it found that the best returns were earned by people who were dead. The second-best investors were people who forgot they even had an account at Fidelity.
With that in mind, it's safe to say that the best strategy is to start as soon as you can and continue investing regularly for as long as you can. If dead people can do it -- and do it well -- you can, too.
