Time, All I Have Is Time
Don’t Listen to Me, But Please, Hear Me Out: Part 2
Markets are still volatile although it has pared some of the losses. Most of us are still nervous. But before you hit that sell button, please hear me out.
I saw the chart below when I was wasting time on Twitter as one does while cooped up at home. H/T Liz Anne Sonders, Chief Investment Strategist, Charles Schwab & Co. This is as of March 30th and we have had rough April 1, so things are still unpredictable to say the least.
This chart is great. While all Global indices are down from the Highs of 2020, all of them are up compared to the Lows of 2020. So, for example, On March 23rd, $SPY was trading at a low of $218.26 and on March 31 as I am writing this it hit a high of $263.25. Had you been super lucky & visionary to buy and sell at exactly these times you would have had a sweet gain of 20.6% within a mere 8 days. In other words, $10,000 invested in $SPY on March 23 would be worth about $12,000 on March 31.
This is important as I am focusing on two main investment philosophies in this blog:
1. TIME IN the market matters. TIMING the market is next to impossible.
2. Dollar Cost Averaging. Because it’s impossible to Time the market, investing some amount consistently and over a long period will ensure that you don’t always buy at the highest point nor sell at the lowest point.
Brace yourselves, lots of tables and charts coming up, but I promise you its difficult to read.
Time IN The Market
I am bullish on markets in general, especially the USA market. I usually look at both S&P and the DJIA indices. As I discussed in my article from March 26th, I have been through a few market crashes. But the best part is that the US marlets, the S&P 500 index, over its history has had an upward trajectory. Moreover, in recent times, the time to recovery seems to be getting shorter. Of course, the COVID19 pandemic is a truly global and unprecedented phenomenon, so we may be in for a longer recovery period but recover we certain shall. (Chart Source: Macrotrends).
The S&P 500 is a stock market index that tracks the stocks of 500 large-cap (big companies) U.S. companies.
We can see that after the 1930 Great Depression to the dot com crash in 2002 to the Financial crash of 2008, the market has steadily climbed up from previous highs.
Seeing is Believing
Let us imagine 3 individuals, who all share their birthdays on Jan 2. They were each super lucky and an aunt gifted them $10,000/- each when they turned 25. Amira turned 25 in 1993, Betty turned 25 in 2003 and Chetna turned 25 in 2013. Their aunts were so good that they encouraged the nieces to invest in S&P500 Index Fund ($SPY ETF, Exchange Traded Fund). On March 30, 2020, $SPY closed at about $261.65.
Figure 1: Lump Sum Investment in $SPY
Amira went through 9/11, 2002 as well as 2008 crashes. But her returns are still an impressive 496% and the current value of her $10,000/- is nearly $60,000. Betty’s investments are worth over $28,000 up 180% in 17 years and Chetna’s investments grew to almost $18,000 up 78% in 7 years.
Now I know what you’re thinking, the market has dropped significantly. What was the value of the investments before everything went pear shaped? Well, suppose our intrepid women had magical foresight and sold their entire shares in $SPY on let’s say, March 2, 2020, when $SPY closed at $309.09, what would their cash positions be on March 30, 2020?
Figure 2: Lumps Sum Investment in $SPY with a sell off on March 2, 2020
So, yes, they could have had a much bigger pay day, had they sold on March 2. So, does that mean then that they are bad investors or that the stock market is really bad place to be?
Maybe not. If you look in Figure 1, even our youngest investor, Chetna, has enjoyed a nearly 80% return over 7 years. That’s 10% every year. We all know if we kept money in our savings account instead of investing, we would have barely earned 0.5% per year in interests.
Please also remember that we are facing an unprecedented extreme shock, and this is not normal behavior for the markets. So, when should we get IN the market (buy) and when should we get OUT of the market (sell)?
The obvious answer is of course, Buy Low, Sell High. But it really doesn’t help you, does it? Because when do you know it’s really low or really high? It all depends on your risk appetite and your financial goals. I will talk more about risk profiles, and the compounding impact of investing especially for long term investments, in a future blog.
One great way to mitigate the question of when do buy and when to sell is to invest some amount, consistently over a period of time. Doing this ensures that you average out your cost of purchase so that you are never buying at the highest price nor are you selling at the lowest price. This is called Dollar Cost Averaging.
Dollar Cost Averaging
Now most of us may not have that awesome aunt to give us $10,000/- in lump sum on our 25th birthdays. The best thing to do then is invest a modest amount consistently. Let us say each of our 3 intrepid investors were able to invest in SPDR S&P 500 ETF Trust (SPY) once every month, let’s say on the 12th or 14th of each month.
Figure 3: $100 Invested Monthly In $SPY
In this case, Amira would have invested $32,700 if she started investing $100 every month, from Feb 1993 until March 2020. She would have doubled her investment by now and had over $78,000 in her portfolio. What is important here is the average price at which she has bought $SPY over the course of the investing life. She has only paid $109.38 per unit whereas current market price is $261.65. This is the magic of Dollar Cost Averaging.
You can see that even Betty and Chetna are doing well because of Dollar Cost Averaging. Even though the market has fallen significantly, even Chetna is in the money as her average cost per unit of $SPY is about $220 a good $40 cheaper than the market price today. You will also notice that the longer you invest, the cheaper your purchase price becomes.
When you combine Time In The Market and the effect of Dollar Cost Averaging, you can begin to seriously start building a healthy nest egg. For illustration purposes, I assumed the ladies invested $100 every month, but it is very likely that the women would have had bonuses and salary raises that could have helped increase the monthly contributions.
Still Not Convinced?
We are bound to repeat history, but we can be smarter and learn from history. So, let’s look at what happened during the 2008 Financial Crash. Let’s go back to our seasoned investors, Amira and Betty (Chetna was too young in 2008).
Let’s imagine that Amira and Betty panicked and sold their investments in September 22, 2008 when markets were falling. $SPY closed at $120.85 on that day. Again, imagine they had been consistently investing $100 per month.
Figure 4: Sell Investment in $SPY during 2008 Financial Crash
Since Amira was in the market longer, she did have a decent gain but unfortunately Betty had no gains. In fact, you could say Betty lost money, because her investments didn’t even return a modest 0.5% that she could have earned from the bank. But at least Betty believes, that it is good to get out without losing more.
So now what should both of them do with the cash? (I am not taking into consideration any tax implications here. Assume 0% tax).
Human nature is such that if we have a lot cash in the bank, we may spend a lot, if not all of it.
But Amira and Betty are very smart ladies and they pumped each other up to continue their savings habit. They decided to invest their money in Fixed Deposits (FD) or Certified Deposits (CD) in their banks for 1 year each and roll over (re-invest) the interest earned. They also invested USD $1200 ($100 a month, is $1200 per year) in December of every year when they renewed their deposits. How did their investments grow?
Figure 5: Fixed Deposit Growth
So, as of Jan 1, 2020 (or Dec 31, 2019), Amira would have had almost $48,000- and Betty would have had approximately $24,000 in savings. Please note that the Interest Rates are historic rates for 1 year CD’s.
What is the opportunity cost of not spending TIME IN THE MARKET? Well, from Figure 3, we know that Amira would have had over $78,000 and Betty would have had almost $37,000. They lost the opportunity to build additional wealth to the tune of $31,000 for Amira and $14,000 for Betty.
The chart below illustrates it much better for Amira’s case. The Green Line is Amira’s investment value had she stayed in the market. The Orange line shows growth of her investments whence got out of the market and chose to invest in Fixed Deposits / Certified Deposits. The blue line is the total payments she made and it is the same amount for both cases.
1. Time In The Market is what matters. Unless you are a powerful and unscrupulous senators like Richard Burr or Kelly Loeffler, who traded on insider information making millions of dollars in profit, the average Jane like us cannot time the market, nor can we probably sleep at night doing that.
2. Investing small amounts consistently over time will ensure that you are never caught investing at the highest prices and selling at the lowest prices. The longer you stay in the market and consistently investing, the better your long-term results will be.
3. If you are worried or want to limit your losses, and you have an investment advisor, talk to her about rebalancing your portfolio.
Charlie Munger said it best: “‘The big money is not in the buying or the selling, but in the waiting.’
Finished reading? Check out my next blog where I compare some of the top performing mutual funds against the S&P 500 Index fund.
If you would like to understand more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at say @shaheedasays.com. I’d be happy to offer you my services.
I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me, and I’ll do my best to help you with your queries.