You probably have heard the old adage – “there are no dumb questions, only dumb answers.” The question “When is the best time to invest?” is no exception.
It is a very good question that I am often asked. I will not waste your time proposing dumb answers, although I have heard many. And when I hear someone give one of them, I like to ask another question, namely “how much commission do you earn if I follow that advice?” There are in fact four correct answers to the title question. Now that is getting your money’s worth!
Best Time to Invest:
Each of these answers is worth spending a few minutes on, and you then can choose which best applies to you, and therefore which answer best fits your situation.
01. Based on the First Commandment of Investing (covered in detail in a future article) – Buy Low, Sell High – the answer is simply “buy when the price is low”. This rule is always worth following. If the market or a stock price is at a new high, it is not a good time to buy. Buy when prices drop, sell when they go up. Like following each of the Ten Commandments of Investing (and the Ten Commandments in the Bible, Torah or Quran) – It is simple, but not easy!
02. Based on dollar-cost averaging (discussed in a future article) – buy small amounts regularly. I will not go through the math now, but the principle is quite straightforward – and yes, it works in other currencies too. When you buy regularly, you will buy a larger number of shares when the price is low, and fewer when the price is high, giving you better gains than buying at an average price. And you will have far better gains than buying at the highest price.
You can further improve on this by buying a bit more than your regular amount when prices are low, and trimming your purchases when prices are higher. Just do not stop investing when prices rise, or you may regret you bought too little of a great investment.
The biggest advantage of this approach is that it encourages you to save a regular amount and invest it, rather than put off investing until you have more money put aside.
I suspect this principle is what inspired folks like Sir John Templeton, Edward C. Johnson 2d (Fidelity), and John C. Bogle (Vanguard) to launch mutual (investment) fund companies. These funds are ideal for regular investments of small amounts. Although, admittedly, they work even better with large amounts.
03. With the Power of Compounding (another future article), the answer is: the sooner the better. Just like the answer to “when is the best time to plant a tree?” (the correct answer is 20 years ago), we can settle for now as being next to best.
Compounding is simply the interest, dividends, or gains you earn on the earnings from prior years. A simple example: if you earn 12% per year (realistic) on an investment of 100, your total after ten years is not 220 (100 + (10 x 12% x 100)), it is 310.6. And that same 100, earning 12% after 50 years, will be worth 28,900.
Try the calculations! Each year you earn 12% on not just the principal (original amount) but also the earnings accumulated over the prior years.
The big lesson from all this? Stop telling yourself that you do not have money to save or invest now, and you will invest a large amount in the future when you are earning more. That is like getting some shade from a tree you plant ten years from now. The Power of Compounding is why I am glad I started investing 35 years ago.
04. When Sir John Templeton was asked this same question many years ago, I recall when he paused and reflected (as he often did) and answered: “when you have money.”
This may seem like a great punch-line to end an article, but it actually is correct and quite profound. Sir John was the person who pioneered the investment fund business in the U.S., and later the concept of global investing before most Americans knew there were other financial markets. He lived his later years living comfortably in the Bahamas. He is one of the real gentlemen of the investing industry who invested other people’s money (and his own) very wisely.
Back to his answer. The first insight seems obvious -If you do not have the money you cannot invest it. If that fits your situation, then you should make sure you do not miss an upcoming article on saving and investing. Even those who buy on margin, or sell short, need some money to do this.
The other aspect of his response is more subtle – implying that if you do have money, you should be investing it. Sir John was a long-term investor who was very optimistic about the prospects for the world. I can almost hear him say, “there is no time in history where people were as well off as they are today.”
When is the Best Time to Invest?
His forecast for the Dow Jones Industrial Average at the end of this century – 1 million. To put that in context, at the end of the last century (I use December 31, 1999) the Dow was at 11,500, and it only requires a 4.6% annual growth to get to 1 million in 100 years. Was he overly optimistic?
Well, Sir John would have (and I can) reassure you it will not only get up over 14,000 again but even exceed the 4.6% growth at various periods of time. Unfortunately, I am not allowed to tell you exactly when. Re-read answer 1. above, and you will realize when the Dow Jones was 10,400 ten years later, 2010 is a better time to invest (at least in U.S. stocks) than December 1999.
So, whether you decide to wait for a lower price level, invest regularly, start immediately (20 years ago would be better), or wait until you have more money – Happy Investing, and you will be glad you did!