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Timing the markets

Lesson in Course: Market movements (beginner, 4min)

We're afraid to lose my money. Should we wait until there's a perfect time to buy?

Eureka!

What it's about: Many people wait to invest at the "perfect" time because they are afraid of losing money.

Why it's important: This fear shouldn't stop us from investing because no one can actually predict where the markets are going.

Key takeaway: Waiting for the perfect time has a heavy opportunity cost and we can mitigate risks by dollar-cost-averaging.

Investing right before a crash is a fear that all investors have. No one wants to be stuck without a chair when the music stops. While it could happen, no one can predict the future or know precisely when the next crash will happen, so this fear shouldn't stop us from investing.  

Modern-day magicians

"Markets are going to crash! Sell now." "Bitcoin will be $80,000 in a month; buy now!" "The investor who bought Amazon stock at $20 says you should buy these 3 stocks!"

We need to be wary of headlines like these. The dynamics of supply and demand combined with people's perceptions of value largely determine market prices, making them impossible to predict. Hedge funds and professional investors on Wall Street all know this. It's why they hire the brightest statisticians to help them consider all likely outcomes rather than predicting just one.

The following clip from Wolf of Wall Street describes the unpredictability of markets.
https://youtube.com/embed/wM6exo00T5I?start=105&end=140

However, this hasn't stopped certain people from trying or professing that they can. After all, convincing unsuspecting folks to buy shares based on speculation that the price will continue to go up (a pump and dump scheme) is easier than predicting the market. 

Likewise, we can always tell people to buy an umbrella today whether we believe it's going to rain or not. If it rains later, we'll look like a genius. But if it doesn't, then we'll just tell them again tomorrow. Eventually, we are bound to be correct.

"It's going to rain again tomorrow"

Investing at the wrong time

For those starting to invest for the first time, putting money in the market right before COVID-19 would have been stressful.

COVID-19 caused the stock market to crash at the beginning of 2020

It's important to remember that no one, even professional investors, can time the market correctly. It can be more costly to wait for the "perfect time" to start investing because we'll miss compounding returns while we wait. Instead, things begin to appear brighter if we take a look at long-term results.

The stock market recovered quickly shortly after the crash
 

Not going all-in on the first hand

An effective strategy to help us reduce the risk of just plain bad luck or poor timing would be to space out our investments. Let's say we had $500 to start investing at the beginning of 2020; losing nearly $160 right away would have been discouraging and tough to recover.

It's wise to split our bet and conserve our chips

If we split the $500 into 5 increments of $100, we would have only lost $30 when the pandemic set in. Furthermore, we would have been able to buy at the lows with the remaining $400. This is called dollar-cost-averaging (DCA).

Actionable ideas

The scariest thing for most emerging investors is making that first investment. Even veterans want all of their trades to be "perfect". Trying to be a perfectionist carries a heavy opportunity cost. You'll miss out on a lot of gains while you wait for the "right time". In most cases, the right time is sooner rather than later.

Investing at the wrong time or losing a little bit of money can feel like a kick-in-the-gut at first. It feels a lot like scratching or getting a stain on something you just bought. However, keep your eyes further down the road. While sharp in the short term, they'll seem like small blips that hardly matter in the long run.