August 2016 Edition-Investment timing versus strategy
Investment timing versus strategy

Investment timing versus strategy

Which one wins?

Which one wins; timing your share purchases perfectly or sticking to a solid investment strategy over time? The obvious answer is a good mixture of both. However, perfect timing rarely occurs and often involves a little bit of luck. So what happens if you only invest at the highest points of the market? To answer the question, meet Bob, the world's worst market timer. 


Bob began his career in 1970. He was a diligent saver and planner. His plan was to save $2,000 a year during the 1970s and bump that amount up by $2,000 each decade until he could retire at age 65 by the end of 2013 (so $4,000/year in the 80s, $6,000/year in the 90s then $8,000/year until he retired). He started out by saving the $2,000 a year in his bank account until he had $6,000 to invest by the end of 1972.

 

Bob's problem as an investor was that he only had the courage to put his money to work in the market after a huge run up. Therefore, all of his money went into the American S&P 500 index fund at the end of 1972.

 

The market dropped nearly 50% in 1973-74 so Bob basically put his money in at the peak of the market right before a crash. He never sold his fund shares. He held on for dear life because he was too nervous about being wrong his sell decisions as well.

 

Bob didn't feel comfortable about investing again until August of 1987 after another huge bull market. After 15 years of saving he had $46,000 to invest. Again he put it in an S&P 500 index fund and again he invested at a market peak just before a crash. This time the market lost more than 30% right after Bob bought his index shares. Timing wasn't on Bob's side so he continued to keep his money invested as he did before.

 

After the 1987 crash Bob didn't feel right about putting his future savings back into stocks until the tech bubble really ramped up at the end of 1999. He had another $68,000 of savings to put to work. This time his purchase at the end of December in 1999 was just before a 50% downturn that lasted until 2002.

 

This buy decision left Bob with some more scars but he decided to make one more big purchase with his savings before he retired. The final investment was made in October of 2007 when he invested $64,000 which he had been saving since 2000. He rounded out his string of horrific market timing calls by buying right before another 50%+ crash in the GFC.

 

After the financial crisis he decided to continue to save his money in the bank (another $40,000) but kept his stock investments in the market until he retired at the end of 2013.


To recap, Bob was a terrible market timer with his only stock market purchases being made at the market peaks just before extreme losses.


Here are the purchase dates, the crashes that followed and the amount invested each time:

Date of investment Subsequent Crash Amount invested
December 1972 -48% 6000
August 1987 -34% 46000
December 1999 -49% 68000
October 2007 -52% 64000
Total 184000

Luckily, Bob never sold out of the market even once. He didn't sell after the bear market of 1973-74 or the Black Monday in 1987 or the technology bust in 2000 or the financial crisis of 2007-09.

So how did he do?

Even though he only bought at the very top of the market, Bob still ended up a millionaire with $1.1 million. Here's how he did it:

 

First of all Bob was a diligent saver and planned out his savings in advance. He stuck to his goals. Second, he allowed his investments to compound through the decades by never selling out of the market over his 40+ years of investing. 

 

He did have to endure a huge psychological toll from seeing large losses and sticking with his long-term mindset (I like to think Bob didn't pay much attention to his portfolio statements over the years).

 

And finally, he had a very simple and low cost investment plan - one index fund with minimal costs.

If he would have simply dollar cost averaged into the market on an annual basis with his savings he would have ended up with much more money in the end (over $2.3 million).

In Summary:


  • If you are going to make investment mistakes, make sure you are biased towards optimism and not pessimism. Long-term thinking has been rewarded in the past and unless you think the world or innovation is coming to an end it should be rewarded in the future.
  • Losses are part of the deal when investing in stocks. How you react to those losses is one of the biggest determinants of your investment performance.
  • Saving more, thinking long-term and allowing compound interest to work in your favor are your biggest accelerants for building wealth. These factors have nothing to do with picking stocks or a complex investment strategy. Any disciplined investment strategy should do the trick.


(Credit: Ben Carlson, CFA – A Wealth of Common Sense)


This story was for illustrative purposes and I wouldn't recommend a portfolio consisting of 100% in stocks of a single market like the S&P 500 unless you have an extremely high risk tolerance. 

This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. Please contact the GCC Financial Team if you have any queries or would like to discuss further.

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