What’s the Right Time to Invest?

Imagine for a moment that you’ve just received a year-end bonus or income tax refund. You’re not sure whether to invest now or wait. After all, the market recently hit an all-time high. Now imagine that you face this kind of decision every year—sometimes in up markets, other times in downdrafts. What’s a good rule of thumb to follow?

Our research definitively shows that the cost of waiting for the perfect moment to invest far exceeds the benefit of even perfect timing. And because timing the market perfectly is, well, about as likely as winning the lottery, the best strategy for most of us mere mortal investors is not to try to market-time at all. Instead, make a plan and invest as soon as possible.

Five investing styles
But don’t take my word for it. Consider our research on the performance of five long-term investors following very different investment strategies. Each received $2,000 at the beginning of every year for the 20 years ending in 2006 and left the money in the market once invested. Check out how they fared:

1. Peter Perfect was a perfect market timer. He had incredible skill (or luck) and was able to place his $2,000 into the market every year at the lowest monthly close.
   
   For example, Peter had $2,000 to invest at the start of 1987. Rather than putting it immediately into the market, he waited and invested after month-end November 1987—that year’s monthly low point for the S&P 500® Index (a proxy for the stock market).
   
   At the beginning of 1988, Peter received another $2,000. He waited and invested the money after January 1988, the monthly low point for the market for that year. He continued to time his investments perfectly every year through 2006.
   
2. Ashley Action took a simple, consistent approach: Each year, once she received her cash, she invested her $2,000 in the market at the earliest possible moment.
   
3. Matthew Monthly divided his annual $2,000 allotment into 12 equal portions, which he invested at the beginning of each month. This strategy is known as dollar cost averaging. You may already be doing this through regular investments in your 401(k) plan or an Automatic Investment Plan (AIP), which allows you to deposit money into mutual funds on a set timetable.
   
4. Rosie Rotten had incredibly poor timing—or perhaps terribly bad luck: She invested her $2,000 each year at the market’s peak, in stark defiance of the investing maxim to “buy low.” For example, Rosie invested her first $2,000 at the end of August 1987—that year’s monthly high point for the S&P 500. She received her second $2,000 at the beginning of 1988 and invested it at the end of December 1988, the peak for that year.
   
5. Larry Linger left his money in cash (using Treasury bills as a proxy) every year and never got around to investing in stocks at all. He was always convinced that lower stock prices—and, therefore, better opportunities to invest his money—were just around the corner.

The results are in: Investing immediately paid off

For the winner, look at the graph, which shows how much wealth each of the five investors had accumulated at the end of the 20 years (1987–2006). Actually, we looked at 62 separate 20-year periods in all, finding similar results across almost all time periods.

Naturally, the best results belonged to Peter, who waited and timed his annual investment perfectly: He accumulated $146,761. But the study’s most stunning findings concern Ashley, who came in second with $141,856—only $4,905 less than Peter Perfect. This relatively small difference is especially surprising considering that Ashley had simply put her money to work as soon as she received it each year—without any pretense of market timing.

Matthew’s dollar-cost-averaging approach delivered solid returns, earning him third place with $134,625 at the end of 20 years. That didn’t surprise us. After all, in a typical 12-month period, the market has risen 75% of the time.2 So Ashley’s pattern of investing first thing did, over time, yield lower buying prices than Matthew’s monthly discipline and, thus, higher ending wealth.

Rosie Rotten’s results also proved surprisingly encouraging. While her poor timing left her about $18,262 short of Ashley (who didn’t try timing investments), Rosie still earned significantly more than double what she would have if she hadn’t invested in the market at all.

And what of Larry Linger, the procrastinator who kept waiting for a better opportunity to buy stocks—and then didn’t buy at all? He fared worst of all, with only $61,622. His biggest worry had been investing at a market high. Ironically, had he done that each year, he would have still earned more than twice as much over the 20-year period.

[see also DCA or lump sum?]