Comparing the best investment strategies: should we wait for the right moment to invest or buy regularly?
The first thing to consider when choosing your investment strategies is time: is there a right time to invest? If you too have thought at least once about making your savings pay off, without knowing when to start, there is good news: you can start now and get results even without being a financial guru and spending all day interpreting numbers and charts.
According to research by Charles Schwab, a multinational financial services company, waiting for the right time to enter a market is very expensive. In other words, buying an asset by trying to calculate ideal market conditions is less convenient than relying on a recurring purchase.
Is market timing the best investment strategy?
The purpose of Charles Schwab’s 2021 analysis, which we will present in this article, is to understand whether market timing works. That is, to seek an answer to the question: is there a right time to invest? The term ‘market timing’ refers to the attempt to find the best time to buy or sell an asset. You can consider market timing as one of the investment strategies adopted by investors who try to anticipate market movements and, for example, sell before a fall and buy before a rise. For the company’s analysts, market timing does not help to make one’s savings pay off. Let’s see how they came to this conclusion.
The 5 investors’ thought experiment
Charles Schwab scholars conducted a thought experiment on five different investment strategies. Each investor was given a $2,000 budget per year to invest in the S&P 500, the most important US stock index, for twenty years, from 2000 to 2020.
- Peter Perfect
Peter is the perfect market timer, that friend who is always successful at what he does. By skill or luck, he has managed to place his annual $2,000 by always finding the right time to invest. For example, in 2001 he waited until 21 September, the lowest closing level of that year for the S&P 500.
- Ashley Action
Her investment strategy is simple and consistent: each year she invested $2,000 in the market on the first day of the year.
- Matthew Monthly
Matthew divided his budget into 12 equal shares that he invested at the beginning of each month, with a strategy called dollar cost averaging that can be implemented with recurring and automatic purchases.
- Rosie Rotten
The fourth investor had poor timing and a lot of bad luck: she placed $2,000 each year at peak market times. For example, Rosie invested her first $2,000 on 30 January 2001, the highest closing level of that year for the S&P 500.
- Larry Linger
He, waiting for the right time, never invested in stocks but kept his budget in cash or Treasury bonds.
At the end of twenty years of investment, the profits are as ranked below:
- Peter Perfect: $151,391
- Ashley Action: $135,471
- Matthew Monthly: $134,856
- Rosie Rotten: $121,171
- Larry Linger: $44,438
So what was the best investment strategy?
The best results of course are Peter’s who waited and planned his annual investments perfectly. But the most surprising and least expected results of the study concern Matthew and Ashley, the latter coming in with only $15,920 less than the first ranked and Matthew with only $16,535 less. Matthew’s recurring purchase approach performed well. The difference in profits is relatively small, considering that he simply invested regularly without calculating timing or market forecasts.
Another obvious consequence of the research is that even bad timing still wins out over inertia. Although Rosie lost $14,300 compared to Ashley (who did not try to predict the market), Rosie still made almost three times what she would have made if she had not invested at all.
To sum up, the experiment shows that it’s worthwhile to invest now, and not to wait for supposed better times. And that putting one’s savings in motion even in a difficult market moment is still better than not investing at all.
Charles Schwab examined 76 other 20-year periods and almost always found similar results in the ranking of investors for their returns. Even in periods with unexpected rankings, those who invested early never came last.
What all this means for you
If you have a budget to invest in some market and do not know the best time to do so, starting now and on a regular basis could be the winning choice.
The benefits of market timing do not stand out; this investment strategy only pays off for those with the skills or luck to anticipate trends. Regularity is less risky and more efficient.
The winning choice of recurring purchase
If you do not have the possibility or do not feel like spending your entire annual budget at once, consider recurring purchases. This way you can place smaller amounts more frequently. Recurring purchase has the advantage of:
- Preventing laziness: this research shows that the ‘I’ll do it later’ or ‘maybe it’s better to wait’ approach does not work at all;
- Minimise the stress of those who seek the perfect moments at all costs and the regrets of large investments that have failed;
- Untie your profits from the timing of the market and its volatility.
The best investment strategies? There is no such thing! The research concludes that, given the difficulty of predicting the market, the most realistic strategy for most investors is to set up recurring purchases.
