“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson, Nobel Prize-Winning Economist
As an investor, you‚Äôve probably heard the saying that ‚Äútime in the market beats timing the market.‚Äù Here’s why that phrase is so popular.
In spite of financial pundits‚Äô predictions, no one ever really knows what the market is going to do next. For example, right now the media is full of doom and gloom over what appears to be a slowing economy and political uncertainty as the 2020 election approaches.
Will the market continue to have up days and down days until then? Absolutely.
Can anyone predict in advance exactly which days those will be? Not a chance.
Another popular sentiment currently is that the market is overvalued, and so you should wait for the market to drop. Only then should you invest for the long haul. But unless you have a crystal ball, you‚Äôll probably never find that perfect market bottom.
Sitting on the sidelines waiting for just the right entry point is even worse when it comes to missing the opportunity to invest in dividend paying stocks. One of the biggest advantages of dividend investing is getting paid to hold a stock (or basket of stocks) while you wait. While the market may go up or down, dividends are paid on a predictable, regular schedule. And the power of compounding works in your favor regardless of what the market does over a day, or month, or even a year.
In fact, the longer your time horizon, the more likely you are to have positive returns. Here is a chart from my anonymous Canadian friend at The Measure of a Plan showing the distribution of both positive and negative annual stock market returns from 1872 up to 2018. Note that while there are some years with negative returns, and that some of those are pretty steep, there are more than twice as many years with positive returns‚Äîin some cases very positive.
Courtesy of The Measure of a Plan
But here‚Äôs my favorite graphic, also courtesy of TMOAP. It shows exactly why your time horizon matters, and why most financial experts recommend that you only invest money in the stock market that you don‚Äôt expect to need for at least five years. This graph shows market returns from 1872-2018 again, but this time over rolling 5, 10, 15, and 20-year periods, taking dividend reinvestment and inflation into account.
With a longer time horizon, not only are you more likely to see positive returns overall, you‚Äôre giving your money more time to grow through compounding and dividend reinvestment.
Related: Earning more by doing less
So, waiting for the next big market dip has a serious opportunity cost‚Äîyou‚Äôre losing 2-4% dividend return per year of waiting, in addition to possible dividend increases.
This is why sitting on the sidelines costs you money. Missing the down days in the market means that you are also missing the most profitable up days. According to Michael Batnick, the director of research at Ritholtz Wealth Management, missing just the 25 strongest days in the market since 1990‚Äîwhich takes into account the Great Recession, BTW‚Äîgives you the equivalent return of investing everything in Treasury notes. That‚Äôs certainly going to reduce your risk of losing money, but you‚Äôre not going to build much in the way of wealth. At least, not within a normal human lifespan.
The bottom line? Make sure you have an emergency fund, and invest according to your risk tolerance‚Äîno fiduciary financial planner would ever recommend putting all your money into stocks. But if you want to build wealth over time, having money in the market, especially in dividend stocks, is one of the most lucrative ways to do that. The operative word here is time. The best time to invest is always yesterday. But the next best time is today.