There are just as many stories of investors making tons of money by getting into stocks right before a rally as there are of investors avoiding losses by selling a stake before a stock market crash. Hearing those types of stories can sometimes cause people to wonder if they should hold off investing and wait to time it before the next market frenzy. But that isn't the wisest approach.
If you have the financial means and your other financial matters are in order -- such as an emergency fund and high-interest debt paid down -- you should consider investing. The stock market's short-term performance shouldn't dictate if you invest or not, especially if time is on your side.
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Consistency is the name of the game
It's fairly easy to invest consistently during bull markets when stock prices are rising consistently. But it's much harder to remain consistent when stock prices are dropping right before your eyes during down periods in the stock market. Logic says it doesn't make sense to buy a stock today if you can get it cheaper later. The problem is that the stock market doesn't operate logically.
The reality is that timing the market is virtually impossible to do accurately over the long run. There are factors and metrics you can use to make educated guesses about what might happen, but at the end of the day, timing the market is more guesswork than anything. You might occasionally be right, but odds are you'll end up better off in the long term by just remaining consistent.
There is no perfect time to invest
If you're waiting for the "perfect" time to invest, you may never do it. There's an old proverb: "The best time to plant a tree was 20 years ago. The second best time is now." The same applies to investing. More time in the stock market is usually a better wealth generator than trying to hop in and out of the market at opportune times.
As an example, here's how a $10,000 investment in the S&P 500 (^GSPC 1.20%) in 1980 would have looked at the end of 2020 based on how many of its best days (defined by top daily percentage gains) an investor missed:
| Number of Best Days Missed | Annual Returm | End Value of Investment |
|---|---|---|
| 0 | 11.8% | $980,911 |
| 10 | 9.7% | $437,902 |
| 20 | 8.2% | $254,215 |
| 30 | 7% | $158,562 |
| 40 | 5.9% | $103,728 |
| 50 | 4.9% | $70,053 |
Data source: Ned Davis Research and Edward Jones.
By trying to time the market, our hypothetical investor would've surely missed some number of the best says in the market, lowering the end value of their investment.
To be fair, you could make a point about how that same investment would look if investors missed the S&P 500's worst days over that span, but that comes back to the one thing investors want to avoid: trying to time the market. If you're investing for the long term, you don't want short-term happenings in the stock market to cause you to do something that goes against your best interest, like pausing your investing until the "right" time.
A better alternative to market timing
Instead of trying to time the market, you should consider dollar-cost averaging. This involves investing a set amount at regular intervals, regardless of how stocks are performing at the time. For example, if you determine you can invest $1,000 monthly, you might decide to break it into four weekly investments every Tuesday. When Tuesday comes around, it's your job to make your $250 investment no matter what the market is doing.
The frequency of your investments isn't as important as making sure you stick to your schedule. You might make investments when stock prices are high; you might make them when they're low. The goal is to trust that it'll even out over time and prevent a badly timed lump sum investment right before a market drop.
Take Netflix (NFLX 4.17%), for example. On April 19 of this year, its stock price plunged by more than 35% -- its biggest one-day drop in history. Imagine making a lump sum investment in Netflix in the days leading up to that and then seeing your investment cut by a third almost instantly. That could be tough to stomach.
Dollar-cost averaging is how 401(k) plans work. Every paycheck, your plan provider takes a set amount and invests it on your behalf. Sometimes these investments happen at less-than-ideal times (such as when stocks are overvalued). But people generally trust that when it's time for them to access their money down the road, the returns will be there. Have that same trust with your individual investing.
