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The Myth of the Perfect Time to Invest

Raise your hand if you thought on March 9, 2009, that it was a perfect time to buy stocks?

That was the day the S&P 500 bottomed out during the financial crisis, which actually would have been a perfect time to get in the market. From that day into 2014, stock investors experienced a five-year bull market, just one of six since World War II to last that long. So, if you have your hand raised, then you might be reading this over a breakfast of caviar on a yacht sailing around the world.

However, very few, if hardly any investors likely went long on stocks that day. After all, not only is it difficult to overcome fear during a deep recession, but it’s also impossible to predict the future. That means the perfect time to invest is a myth because it only exists in hindsight.

As research shows, investing in hindsight isn’t a very good investment strategy. When most investors realize it’s a perfect time to invest, it’s already too late. This is shown by Dalbar’s annual Quantitative Analysis of Investor Behavior (QAIB). Since the study’s inception, there has been a consistent gap between the performance of leading investment indicators and what the average investor actually earns. In the 2014 QAIB, the S&P 500 produced a 20-year return of 9.22% while the average investor mustered a return of 5.02%. The gap is a result of “withdrawing from investments at low points and buying at market highs,” commonly known as chasing returns.

Such underperformance isn’t exclusive to average investors. Even professional fund managers can’t predict the perfect time to invest, as evidenced by the 2014 S&P Dow Jones Indices study, “Does Past Performance Matter? The Persistence Scorecard.” It found only 2 out of 2,862 broad domestic stock funds performed in the top quartile each year over a five-year period. As reported on by the New York Times, this is “even worse than would have been predicted if the fund managers were flipping coins instead of picking stocks.”

Therefore, making the right bets at the most propitious moment to beat the market is more often than not just plain luck. No one really knows what all the market variables, from earnings ratios to geopolitical events, mean until after the fact.

Your long-term financial decisions depend on several factors, one of the least of which should be what’s happening in the market today. The important thing isn’t when to invest, but how and why. If, over time, your investments provide enough money to reach the financial goals that made you want to invest in the first place – retirement, college education, etc. – then the timing couldn’t be more perfect.