This Is Exactly How Much Money You're Missing Out on When You Time the Market - The Motley Fool
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You could seriously end up hurting your returns in the long run.
Key points
- Some investors try to time the market by buying at an absolute bottom.
- Adopting this strategy could mean missing out on higher returns in the long run.
- Dollar-cost averaging could be a good technique to try.
Your goal in opening a brokerage account and investing your money is to grow wealth -- maybe even a lot of it. And investing consistently, and over a long period of time, is a good way to make that happen.
But one thing you don't want to do in the course of investing is try to time the market. If you do, you might lose out financially in a very big way.
What is timing the market?
When we talk about timing the market, we're referring to trying to buy stocks at their lowest price in the hopes of selling at a much higher price. It's a strategy that might seem to make sense in theory, but often doesn't work out in practice.
Let's say you've been tracking a given company whose share price has been hovering around $100. If the broad market starts to decline, that company's share price might drop to $82. You might hesitate to buy that stock at $82 thinking it will go lower. But if you hold out for a lower price and then it suddenly increases to $92, guess what? You'll have lost out on a great opportunity.
Now, imagine you've adopted that strategy not just in the context of a single stock, but every stock or ETF purchase you make. At that point, you're talking about potentially losing out on thousands upon thousands of dollars in the course of your investing career.
A better approach to investing
How much might you lose if you try to time the market? In a recent recent tweet, financial guru
Graham Stephan illustrated using the following example:
"The market returned 7.2% per year from 1997-2017. But Morningstar found that missing just the 10 best days would take your returns down to 3.5%. And if you missed the 50 best days, you would have lost 4.5%! Timing the market isn't worth it. Stay invested and beat the rest."
So, let's say you have $10,000 invested over 30 years at an average annual 7.2% return. That means you'd end up growing your $10,000 into about $80,500. But if you were to try to time the market, fail, and knock your average annual return down to 3.5%, you'd be looking at just $28,000 after 30 years instead. That's a huge difference.
That's why rather than try to time the market, you should instead plan on investing your money steadily and consistently. And a good approach to take in that regard is dollar-cost averaging.
With dollar-cost averaging, you commit to investing a specific amount at preset intervals. For example, you might land on a bunch of stocks to buy and say you're going to put $500 into them on the 15th of every month, regardless of how the market is doing that day and what price those shares are trading at.
The logic is that if you might pay a higher share price some of the time and a lower price other times. But all in, you're likely to pay a lower price per share than you would by timing the market.
Scoring solid returns in your investment portfolio could make it so you're able to meet your various financial goals, whether it's putting your children through college or being able to enjoy your retirement without financial worry. Trying to time the market could backfire on you and make it harder to meet your goals. So rather than take that chance, commit to investing regularly, and take comfort in the fact that you're pumping money into the stock market consistently.
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