As the year winds down, it's common for people to take a step back, look back at the year, and see what they can improve going forward. One area people tend to look at is their finances. Whether it's evaluating savings, adjusting a budget, or planning investments, the end of the year can be a good time to strategize and set goals.
While reflecting on their financial standing at the end of the year, it's not uncommon for people to wonder if they should hold off on investing until the new year and then resume with a "fresh slate" for the year. For most people, the answer is no, and there's one chart that shows why.
Image source: Getty Images.
Time in the market beats timing the market
Most investors have, at one point or another, been guilty of trying to time the market and invest at an "ideal time." The problem is that there is generally no ideal time other than the present. There's an old proverb that goes, "The best time to plant a tree is 20 years ago. The second-best time is now." I like to apply that same logic to investing.
The focus should be on having as much time in the market as possible. You never know how the market will act on any given day, and missing out on some of its better days (defined by single-day price movements) can noticeably lower your returns.
For perspective, let's see how returns differ based on the number of best days missed by someone who invested $10,000 in the S&P 500 (^GSPC 1.02%) from Dec. 31, 2007, to Dec. 31, 2022.
| Number of Best Days Missed | Value of $10,000 Investment | Annualized Total Return |
|---|---|---|
| 40 | $4,401 | (5.3%) |
| 30 | $6,399 | (2.9%) |
| 20 | $9,748 | (0.2%) |
| 10 | $16,246 | 3.3% |
| 0 | $35,461 | 8.8% |
Data source: Putnam Investments.
There were 3,780 trading days during that span, and even missing out on 10 caused the total investment value to drop by more than half. All it took was missing 20 best days (0.53% of the trading days) to lose money during that period.
Missing a day in the market here and there may not seem important, but it can add up depending on how the market moves. If you have the money to invest before the end of the year, you absolutely should. Nobody knows whether the last couple of weeks of 2023 will include one of those best days.
Trust that consistency will work out in your favor
Remember: Time in the market beats timing the market. Instead of anticipating the right time to invest, focus on being consistent through and through.
The best way I've learned to remain consistent is by using dollar-cost averaging, which involves investing a fixed amount of money at regular intervals, regardless of the market's performance at the time. Market up? Invest. Market down? Invest. Market stagnant? Invest.
By putting yourself on a set schedule, you don't have to focus too much on "Is now the time to invest?" thoughts because your strategy and schedule are already laid out for you.
For example, if you commit to investing $400 monthly into the S&P 500, you could decide to invest $200 every other Monday or $100 every Friday. How often you invest (within reason) doesn't matter as much as making sure it's a schedule you can stick to. Consistency is the most important part, so prioritize it.
