The Shocking Returns of Buying Only at Stock Market Highs
What would happen if you had only bought at stock market highs going back to 1970?
What would happen if you had only bought at stock market highs going back to 1970? In my last video, I explored that question. Here is the transcript along with an ad-free version for subscribers.
Tina is the world’s worst investor. She buys stocks at the highest possible point every year going back to 1970. How much money does she end up with in 2021? Let’s find out.
One of the most common fears people have with investing in the stock market is that they feel like they don’t want to invest right now because stocks are “too high” and are going to crash as soon as they buy. That is especially true today with the S&P 500 just hitting a new all-time high over 4,100. Should you buy stocks when they are at all-time highs?
What if today is the worst possible day to buy this year? Wouldn’t it be better to wait for a market pullback?
To find out, let’s follow along with three high school friends: Average Amy, Savvy Sally, and Terrible Timing Tina.
All three of them started investing $12,000 per year starting in 1970. All three invested in the S&P 500. And, for simplicity sake, we’re going to assume none of them received any dividends. They only got price increases (or decreases).
The difference was in which price they paid.
Saavy Sally was the world’s greatest investor. She could predict the very lowest price the market would trade at each year without fail. So, rather than buying in each month, she would invest her entire $12,000 at the lowest possible price. In 1970, for example, that would have been $69.29.
Average Amy followed a dollar-cost averaging strategy. She put money in every single month without fail, so she invested her $12,000 per year at the average S&P 500 price for that year. For example, in 1970, the S&P 500 index averaged $83.15, so her $12,000 went in at that price.
The final member of the group was Terrible Timing Tina. As you might gather from her name, she was the world’s worst market timer. She managed to invest every single year at the highest possible price. In 1970, that would have been $93.46.
What would happen if each friend were to maintain their same investment strategies through 2021?
In total, all of the friends would have invested $624,000.
Despite having made the worst possible timing decisions and investing every single year at the very peak, Terrible Timing Tina would have still earned an 8.21% annual return. She would have retired with $8,703,148.
Average Amy invested $1,000 per month no matter what. Her results were better than Tina’s, but not that much. She grew her money at 8.49% per year, which was good enough to turn $624,000 into $9,651,142.
Surprisingly the difference between just getting the average market price dollar-cost averaging and making the worst possible annual timing investments was an annual gap of just 0.28%.
However, we have yet to consider how Savvy Sally would have done. She knew exactly the market bottom each year; surely her returns must have been far better. They were, but not by much. She grew her money at 8.89% per year to finish with $11,143,677.
If you had to choose to be one of these three investors, of course, you would choose to be Savvy Sally. She earned the highest returns; however, it is shocking just how little difference it really made. The difference between investing at the worst possible time and the best possible time each year was only 0.68% annually over the long-term.
Can Anyone Really Be Savvy Sally?
Now, consider how unlikely it is that you are going to be able to guess what the market low for 2021 is going to be. Many of the world’s greatest investors admit they have no idea where the market is going next; if they don’t, then what hope do you have? Even if you got lucky in one or two years, there’s no way you can successfully predict each year for the next few decades.
And even if you were able to know the low every single year just like Sally did, it really wouldn’t help you all that much. If you had just invested the same amount each month without paying attention to the price, your returns would have been just 0.40% per year than if you had known the perfect time to buy.
So, if you are agonizing over whether to invest today because the market is at an all-time high, you should stop doing that. Trying to figure out whether or not now is a peak is a wasted effort. What should you do instead?
#1 Focus on Consistency
The best thing you can possibly do is come up with a reasonable investment strategy. That may not be buying the S&P 500. Maybe you want to invest in a basket of dividends stocks. Maybe you want to do something else. Whatever you decide, the most important thing is that you stay consistent and continue adding money month after month.
You do not have to watch the news to try to predict the next market crash. You do not need to anticipate what this year’s market low is going to be. Terrible Timing Tina shows us that even the world’s worst investor who buys the broader market at the absolute peak year-after-year can still end up with a fine result. The key is saving consistently over many decades and not selling when the inevitable bear market does come.
If you can make improvements to your strategy over time, then do so. However, just remember that the most important determinant of your success is how consistently you saved. Speaking of savings, the #2 item on our list is to save more.
#2 Save More
Let’s say that Terrible Timing Tina wanted to match the returns of Savvy Sally without having any special market insights. What does she need to do?
First of all, she needs to copy Average Amy, our friend who bought every single month. Then, she needs to increase her savings each month. She could do that a couple ways. Obviously, she could cut back her spending. But if she couldn’t do that or didn’t want to do that, she could use the time she wasn’t spending making market predictions to start a side business. Or, she could increase her skills at work. Maybe she read a few books, learned how to code, or any other way to make herself better.
If she can earn money on the side or become a better employee, she might get paid more. With the higher earnings, she could save a bit more each month. How much additional money would she have needed to save each month to match Savvy Sally’s ending account value?
If Terrible Timing Tina simply stopped trying to time the market and focused on simply saving an extra $167 per month, she would have $11,259,665 at age 67 - over $100,000 more than Savvy Sally. All that despite having no special market insights and spending no time at all making investment decisions. She just automatically invested $1,000 per month in the market at whatever price it was trading at.
Just saving a little extra per month - 16.7% extra, to be exact - ended up being worth more than having perfect market foresight.
#3: Spend More Time with Loved Ones
Once you have adequate savings each month going into a sound investment strategy, just stop. If all you do in life is build up a massive nest egg, it will have been a failed life.
Stop trying to outguess the market or make constant improvements to your account. Set an automatic contribution each month to an investment strategy you believe in. Then pay as little attention as possible to the news or market prognosticators. Life is too short to obsess over earning maybe an extra 0.40% per year. Go spend some time with your friends and family. Go on a hike. Read a book. That is what is going to make your life truly rich.
Disclaimer: This is entertainment only, not investment advice. All opinions expressed are my own. Any stocks or ETFs mentioned may be owned or taken a position within the next 48 hours. Neither the information nor any opinion expressed it so be construed as a solicitation to buy or sell a security of personalized investment, tax, or legal advice. This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report. The information herein was obtained from various sources. Dividend Growth Machine LLC does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. Dividend Growth Machine LLC assumes no obligation to update this information, or to advise on further developments relating to it.