Did you miss out on the last bull market? Here’s why it’s not too late to invest in the stock market.
Despite a global pandemic, the S&P 500 climbed over 15% in 2020.
At many points along the way, people asked the same question over and over.
Is it too late to invest in the stock market?
No matter when you ask this question, the answer is always no. It’s never too late to invest in the stock market.
That sounds a bit odd. Surely there must be a point when you don’t want to invest in the stock market?
Actually, no. But not for the reasons you might think. Let me explain.
Timing the market is difficult
People who are day trading try to “time” the market. Fewer than 10% of them succeed over the course of a year.
In fact, there’s an open academic question as to whether anyone can time the market without exploiting some underlying mechanics of how a stock trades.
Let’s say you don’t want to buy a stock at all-time highs. Fair enough.
But how much of a pull-back do you wait for until you buy? 1%? 5%? 10%?
Here’s an awesome study that explains why that concept may not work.
Source: J.P. Morgan
As crazy as it seems, investing at all-time highs returns MORE over time than investing at random.
In fact, let’s compare that to buying the dip.
Differences in the datasets aside, this goes to show that markets tend to move in the direction they are headed for quite a while.
So, unless you are excellent at picking out tops and bottoms in the market, chances are, you can’t beat this.
However, there is a great method to optimize around this idea.
Investing comes down to time in the market
Study after study shows that turning a profit in the market isn’t about when you invest but for how long.
Here’s one from Blackrock that shows how this played out from 1926-2019.
In fact, in a recent article, Forbes noted that over the last 20 years, 70% of the best days in the market happened within 14 days of the worst ones.
Think back to the spring of 2020, and you’ll remember how the market dropped hard and rebounded just as quickly.
Taking a step back and looking at the U.S. equity market over time, there have only been a few cases where the overall market or a major market took years to turn around.
A few examples are the Nasdaq after the dotcom bubble burst, the S&P 500 over the entire decade of the 1970s, the Dow Jones from its peak in 1929 until the 1950s, and so on.
However, investors have two techniques to mitigate these events.
Diversification and dollar-cost averaging
Long-term investors use two tools to combat the unknown: diversification and dollar-cost averaging.
Diversification is a simple concept we’re all familiar with: Don’t put all your eggs in one basket.
By spreading your investments across companies and markets, you reduce the risk that any one specific market or company can destroy your returns.
The second strategy, a favorite of Warren Buffet’s, is known as dollar-cost averaging. Dollar-cost averaging involves investing a set amount or percentage of money at regular intervals over time. The most common are 401K contributions.
Since most investors cannot or prefer not to try and time the market, this method ensures they spread out the risk associated with timing the market.
Start with a plan
Before you start investing, the one thing you need is a plan. Think about your goals, risk appetite, as well as your level of involvement.
The worst thing you can do is buy the hottest stock headline. Even if you win the first few times, chances are, you’ll lose out in the long run.
That’s because investing isn’t a race. It’s a marathon.