{"id":14768,"date":"2021-10-25T10:27:42","date_gmt":"2021-10-25T17:27:42","guid":{"rendered":"https:\/\/canary.kcprod.info/blog\/?p=14768"},"modified":"2022-01-11T17:12:14","modified_gmt":"2022-01-12T01:12:14","slug":"dont-wait-for-a-market-decline-to-invest","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/dont-wait-for-a-market-decline-to-invest\/","title":{"rendered":"Don\u2019t Wait for a Market Decline To Invest"},"content":{"rendered":"\n

Getting started with investing can seem intimidating, and we know many investors worry about jumping in when prices seem too high. Instead, many people hold onto cash and wait for a market downturn to start investing. Waiting for a market pullback might feel<\/em> like the right thing to do, but it\u2019s likely to lead to worse outcomes. In this post, we\u2019ll use an example to illustrate why you shouldn\u2019t wait for the \u201cright time\u201d to start investing, and why doing so could cost you big over the long run.<\/p>\n\n\n\n

What happens when you wait for a market decline to invest<\/h2>\n\n\n\n

If you\u2019re worried about investing when the market is \u201ctoo hot,\u201d you might be tempted to invest only when the market has declined a certain amount from a recent high. In this example, we\u2019ll look at what would happen if you waited for a market decline of 1-10% from the previous year\u2019s peak to invest your money, and compare the results to what would happen if you didn\u2019t wait.<\/p>\n\n\n\n

To do this, we\u2019ll assume you set aside $100 at the end of each month for investing. Each market day, you check for a market decline and decide whether or not you want to invest.  If you don\u2019t invest, your money earns daily interest equal to a one-month treasury bill <\/a>(which is more than most traditional savings accounts would actually pay you). If you decide to invest, you invest all of the money you\u2019ve set aside since the last time you invested, plus any interest you\u2019ve earned since then. We\u2019ll use 30 years of S&P total return index<\/a> returns and treasury rates, beginning on October 1, 1991, and ending on September 30, 2021, to understand how your investment would have performed. Using these assumptions, the table below shows your portfolio\u2019s pre-tax value at the end of that 30-year period if you invested your $100 regularly at the end of each month versus if you waited for a market decline of up to 10% to invest. <\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

As you can see in this example, the general trend is that the larger the market decline you wait for to invest, the worse your outcome after 30 years. If you had waited for a 10% decline, you would have missed out on a staggering $43,257.59 of returns. You get the highest return when you don\u2019t wait at all.<\/p>\n\n\n\n

Let\u2019s take a closer look at deposit timing associated with one of the scenarios described above. The chart below shows when you would have put money in the market if you were waiting for a 5% decline from the previous year\u2019s peak, plotted against the S&P 500\u2019s index level.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

As you can see, in this scenario, you managed to \u201cbuy the dip.\u201d You might think this kind of behavior would yield better returns compared to regular deposits, but it doesn\u2019t. Because the market was rising overall, you would have missed out on earnings and left hundreds of dollars on the table. <\/p>\n\n\n\n

This pattern, where waiting to invest costs you returns in the long run, holds true even if you use different criteria for identifying a market decline.  For example, we also looked at what would happen if an investor waited for a market decline of 10% from the previous month (which we defined as 21 market days ago) to invest instead of waiting for a decline relative to the previous year\u2019s peak. We kept all of the other assumptions the same, including the 30-year time period, the amount of interest earned on uninvested cash, and the amount of cash available to invest each month. In that scenario, waiting for a 10% decline from the previous month before investing would cost you $54,276.66 of returns after 30 years. <\/p>\n\n\n\n

Why waiting to invest doesn\u2019t work<\/h2>\n\n\n\n

Buying low sounds great in theory, and it\u2019s not surprising that so many investors think they should wait for the right moment to get into the market. But time in the market is one of the most powerful ways to increase your returns because of the way compounding works<\/a>. When you wait to invest, you give up time in the market and your returns have less time to compound.<\/p>\n\n\n\n

If you zoom out and look at the market\u2019s overall historical performance over a long period of time, the trend is clear: it goes up<\/a>. If you wait to invest, you might succeed at finding a relative low point, but in the meantime, history has shown you\u2019ll miss out on a bunch of good days when the market was rising. You\u2019re also likely to miss some of the key market days that have an outsized impact on your overall returns<\/a>. <\/p>\n\n\n\n

On the other hand, if you put money in the market as early as possible and keep adding to it over time, you can typically benefit from the overall upward trend (not to mention the time you\u2019ll save by not monitoring the market closely). This also means you won\u2019t wait around with your excess cash in a bank account where it is unlikely to even keep up with inflation<\/a>.<\/p>\n\n\n\n

The only \u201cright time\u201d to invest is now<\/h2>\n\n\n\n

We get it \u2014 it can be uncomfortable to invest when the market seems hot. Unfortunately, when it comes to investing, what feels<\/em> right seldom is, and if you wait for a market decline to invest, you are unlikely to come out ahead. Don\u2019t waste time and effort trying to buy the dip<\/a> or pick the \u201cright time.\u201d Instead, we encourage you to start investing excess cash for the long term (which we define as at least 3-5 years) as soon as possible to give your returns more time to compound. <\/p>\n\n\n\n

If you\u2019re nervous about getting started with a big initial deposit, you can use a behavioral tool called dollar-cost averaging<\/a> to help get past that fear. Dollar-cost averaging involves breaking up a large initial investment into smaller chunks that you invest on a regular basis. So instead of depositing the $5,000 you saved up today, you might invest $1,000 every week for five weeks to lessen your fear of picking the \u201cwrong day\u201d to get started. At Wealthfront, we make it easy to set up automated recurring deposits<\/a> to your Wealthfront Investment Account to help you build long-term wealth with very little effort.<\/p>\n","protected":false},"excerpt":{"rendered":"

Getting started with investing can seem intimidating, and we know many investors worry about jumping in when prices seem too high. Instead, many people hold onto cash and wait for a market downturn to start investing. Waiting for a market pullback might feel like the right thing to do, but it\u2019s likely to lead to […]<\/p>\n","protected":false},"author":10000,"featured_media":14792,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1282],"tags":[1305],"coauthors":[2433],"class_list":["post-14768","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-market-timing"],"acf":[],"yoast_head":"\nDon\u2019t Wait for the \u201cRight Time\u201d to Invest \u2502 Wealthfront<\/title>\n<meta name=\"description\" content=\"Don\u2019t wait to start investing because you think the market is \u201ctoo hot\u201d right now. 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