Today, guest host Jeremy Schneider takes over the podcast to cover three BIG topics:
- When market timing works
- How to approach investing a lump sum of money
- What to do if you’re afraid to invest in the stock market
If you’re a retirement investor concerned about investing at market highs, this episode is for you!
How to Listen to Today’s Episode
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- Jeremy Schneider
- Should I invest when the market is at a record high?
- How to Perfectly Time the Market
- Time the Market Game
- Lump-Sum Investing vs Dollar Cost Averaging
When Timing the Stock Market Can Actually Work
Jeremy Schneider: Welcome to the Stay Wealthy podcast with Taylor Schulte. This is not Taylor Schulte. As you may have noticed, my name is Jeremy Schneider. I'm filling in for Taylor for the month of June.
Taylor was kind enough to let me take over his podcast while he is taking some time to hang with his family, take a breather and re-energizing after a busy start to the year. He'll be back on the mic in July with plenty of new episodes. Until then, you are stuck with me.
So as a bit of an introduction, serious fans of the podcast might remember me from episode 64 when we talked about why rent versus buy is the wrong question or you may also remember me from last summer where I also guest hosted five episodes of this very podcast. So if you like me and want to hear more, go back to those five episodes from last July.
I'm not here to talk about myself, but just for some context, if you wanna know who this guy is. My name is Jeremy Schneider. A bit about my story is I started a company in college, an internet company, which I grew for about 12 years and I sold it at the age of 34 for just over $5 million. And then at the age of 36, I was able to quit my job and follow my passion for personal finance.
So I'm not a financial professional, I'm not a CFP or a financial advisor. I would consider myself a serious hobbyist. But what I do is I basically teach about personal finance and investing. I have an Instagram called Personal Finance Club. You can find it at Personal Finance Club on Instagram. I have about 250,000 followers there. And actually I just looked up last July when I did this last time I only had about 80,000 followers.
So I don't know if that means I have three times as many followers. I guess that's good for something. But yeah, that's what I do. I'm also on the tickety talks if you're a kid, as they say TikTok, I guess. Yeah, so that's my story, but let's get to it.
So this is episode number one eleven a hundred and eleven, and if you wanna find the show notes or you wanna find the links for this episode, you can go to youstaywealthy.com/111.
So as a financial or investing educator or financial influencer or whatever you wanna call me, I get a lot of questions and a lot of the questions sound like the following, is now a good time to buy or sell? Should I be investing now at an all-time high? Isn't the market due for a crash? Should I be moving to gold or crypto in anticipation of this out of control inflation that we have coming? What do all these questions have in common?
Well, in my opinion, all these questions are under the umbrella of timing the market, timing the market is any change in decision making based on what you think the market is going to do rather than your own personal timeline. So sometimes you wanna buy or sell, but those decisions should be based on your life, not based on your guess about what the market is doing or going to do.
So for example, a good decision about your own asset allocation, for example, would be something like this. A good decision would be I plan to reallocate towards bonds as I age, as I anticipate being a more investor in my golden years. That's about your own timeline and you saying, Hey, when I'm 70, my opinion about, you know, capital preservation might be very different from when I'm 40. And so I'm planning to reallocate towards bonds over those 30 years. That's a good type of asset allocation decision.
A bad one, which involves time in the market is something like this. I plan to move towards bonds to weather the storm during the pandemic. So for example, a year ago or a little bit more than a year ago now in let's say March or April of 2020, when the market was having those like crazy fluctuations, like up and down 10% a day sometimes, and if you decide to weather the storm and exit the market for the year of 2020, when the pandemic was at its worst, you would've missed the 2020 market was actually up about 18%, including dividend growth in 2020.
So even though we saw a huge crash in 2020, the market recovered. And so if you removed yourself from this pandemic year, you would've missed an 18% gain. That is one of the dangers of timing the market. I also hear so much about investing in the market an all-time high. I heard this in 23rd.
So the question is something like, should I invest an all-time high? And right now it's a hot topic because the market is basically an all-time high. And I also heard about, I heard also heard this question a lot in 2013 and I heard it in 2014 and 2015 and 2016 and 2017 and 2018 and 2019 and 2020. And I'm hearing it again in 2021. And do you know why I heard it in all those years? Because every single one of those years, for the last whatever it was, eight years, we have enjoyed an all, all-time market high.
But could, if you could, would you go back and invest at the all-time market high in 2013? I sure hope so because the market's actually up about 158% since then because the market generally goes up as it measures the total economic output of the US or global market, whatever it's measuring.
To illustrate this, I actually did a little bit of an analysis. I went and downloaded 150 years of the US stock market. We, which we enjoy a very nice long track record in the US. It's like very easy to measure because we have great data for that.
So I went back and looked at 150 years of the US stock market and did analysis and looked at only the months where the market was at a record high. Over that time there have been 298 such months. In fact, about 17% of every month or every month over that period, the market was at an all-time record high.
So about 17% of the time the market is breaking the record. If you look at only those months and then you look at the trail or you look at the 12 months following those months, the average return for the year for the 12 months following an all-time record high is about plus 11.2%.
So if you just invested during those years or during those months that were an all-time record high month and you looked at the following year of performance, you actually would be getting 11.2% return. And so when you say, you know, when you think about the all-time US stock record returns being about 10% on average over the last a hundred plus years, if you look at just the months that our record highs, you would actually do better than average.
You know, of course it's not possible to invest just at record highs because you have to be holding cash on the sidelines waiting for the market to be at record high. Sometimes that would hurt your return, but if we do happen to be at a record high, there's no reason to keep your money out of the market.
In fact, you should be happy that we're in this bull run and expected to continue to go up because that at least is what has happened historically speaking. And I think a lot of people have an incorrect mental model about the stock market. They basically think it's like a yo-yo that goes up or down.
So, and you hear, you know, if you watch the news or you watch CNBC, or even if you read the newspaper, you hear about crashes and you hear about record highs and you just, you kind of think it's an up and down situation, but it's really not. It's more like a yo-yo as you're walking up a long, like an infinitely long set of stairs.
And so in the short term the yo-yo is gonna seem like it's most of the action, but over the long term the stairs that climb up is what really makes a difference. And in the short term the and the market can be a little bit unpredictable. You know, sometimes as you're stepping up the yo-yos going down, sometimes as you're stepping up the yo-yos going up and so you see like a little downswing and then a big upswing or a big downswing and a little upswing.
But as long as you're on that ride on those stairs going up, you're gonna realize that long-term growth, that's the real mental model and it's possible for this infinite long upward stair growth because the market is really a measure of like all former total economic output. So those dividends that are being paid when you're measuring growth of the market are getting reinvested into the market and getting more and more.
So it's almost like an odometer going up and up and up as you measure the total economic past output or in case of your own portfolio, your portfolio is collecting all those dividends, reinvesting, buying more shares and going up and up and up so it really can keep going up.
So the title of this episode is The Simple Strategy that Beats Time in the Market. And so I wanna tell a little bit of a story about this very simple strategy and the story involves three investors, their investors' names are Tiffany, Britney, and Sarah.
And all three of them, these investors invested $200 per month and they only invested in the S&P 500 and they each did it over a 41-year period from 1979 through 2020. But they all had different strategies about when to jump into the market. So Tiffany and Brittany, our first two investors, knew that the market could be volatile and they planned to avoid the crashes.
So if you look over the last 41 years, why 41 years by the way, not 40? Well, because the first time I did this analysis was a year ago and I added an extra year instead of shifting the timeframe just so I get more data in this analysis. But that's what it is. From 1979 to the end of 2020, there have been five major market crashes.
One was Black Tuesday, 1987, the market crashed about 33%, I think it was crashed about, you know, 25% in a single day. And there was reports of, you know, people throwing themselves off of buildings and stuff in response to this terrible market crash.
Then in the early nineties was the Kuwait war where on the market dropped about 20%. Then in the early two thousands the .com crash, the market dropped about 49%. Then in the 2007 to 2009 timeframe, there is the financial crisis where the market dropped 56%.
And then of course, just last year, this is now a very recent memory, the Covid crash where the market dropped about 34%. So there are these five kind of very big dramatic market crashes.
And so Tiffany, our very first investor who has saved $200 per month, she put all of her money into the savings account, earning 3% interest, waiting for the perfect time to invest. But as it turned out, Tiffany is the world's worst market timer. Instead of investing at the perfect time, she invested at the worst time and she invested at the day before each of those five crashes.
So she saved 200 bucks a month in a savings account and then the day before the 1987 Black Monday crash, she put all reminding the market and then washed all tank. But she never sold, she continued holding those shares of the S&P 500 index fund until today. And then her new money, she saved again in the savings account and invested the next market peak. And then her new money she saved again, invested the next market peak. So that's what she did.
So over the course of those 41 years, she actually saved $99,000. But thanks to her buy and hold strategy, Tiffany's $99,000 turned into over $773,000. So she more than seven times her money. So even though Tiffany had the world's worst market timing, and by the way, it's impossible to have timing this bad, nobody knows the day before the crash, you know, if you did, you could obviously do much better than this.
So this is like a theoretical worst scenario, worst case scenario, investing the day before the crash still, even though she did this, thanks to her buying hold strategy, she turned her $99,000 into $773,000. By the way, all of our investing ladies here have very alliterative names where their names represent their investing strategies.
So Tiffany, terrible timing teases. Britney on the other hand, Britney buys at the bottom, Britney buys at the bottom, she buys low so she also saves her $200 a month. But instead of investing at the day of the very top of the market peak, she has like the omniscient perfect, only hypothetically possible, perfect possible timing. She invested the very bottom of the stock market.
So instead of investing at the day before the 1987 black money, she invests at the very bottom of the market as the bottoms like the day. That's the very worst. And then she, you know, then she stays opera money, then then invests again in the bottom of the next market crash and then invest again the next bottom of the next market crash.
And so Britney has the world's best market timing. So her $200 per month or her $99,000 over the course of 41 years turns into 1.1 million. So it's about 45% better than Tiffany, which kind of makes sense because those crashes were all about 40% or so, you know, between, you know, 30 and 58% or whatever. And so on average she's gonna do 45% better. So instead of Tiffany's $773,000, Brittany's 1.1 million is obviously much better. And it makes sense because if you could invest at the bottom, you obviously would.
But there's one other strategy and this is slow and steady Sarah. Sarah didn't have much interest in watching the marketer trading it all. In fact, Sarah only did one thing on the day. She opened her account in 1979, she set up a $200 per month auto investment in an S&P 500 index fund and never looked at her account again. She invested on the up mark on the up months, on the down months at the top of the crash, at the bottom of the crash.
She just put her money in every single month and never made a trade other than her periodic purchases. And what did her strategy net her? Instead of Britney's 1.1 million, which was Britney who bought at the bottom of the market, slow and steady, Sarah ended up with over 1.6 million.
So even, you know, her slow and steady approach crushed even the perfect timing, market timing. How is that possible? Well it turns out the market is usually going up and so if you are someone who's waiting for 30% pullback, you might have to wait for a 200% gain. And so that's what happened to Britney.
You know, as she was waiting for the .com crash, she missed the nineties as she was waiting for the financial crisis, you know, she missed another doubling the market as she was waiting for the Covid crash she missed 2013 to 2020.
You know that those were amazing years in the market. So if you're waiting, you know, if you're keeping money in the sidelines waiting for a crash, even if you have perfect timing and can pick the exact bottom of every 30% crash or every 20% crash, you're still gonna be worse off than just putting the market money in early and often.
So hopefully that made at least a pretty convincing argument on some reasons not to try to time the market and rather to invest early and often. But sometimes there's another decision in this realm that you have to make and that is when you get a lump sum of money.
So let's say you get a big bonus at work like far above and beyond your normal like monthly pay or you could receive inheritance or you get a lawsuit settlement or a lottery winnings and you get this big lump sum of money, what do you do with it? Hopefully you know that the wrong thing to do would be to hold onto it until the right moment to jump into the market because that's much more likely to hurt you than it is to help you.
But you're still off with two choices. The first choice is what's called lump sum investing, which is just dumping it all directly into the market, which is a perfectly good option by the way, than the other options what's called dollar cost averaging. And people love the term dollar cost averaging. I'm sure you've heard it, people love saying it, I don't know why it just rolls off the tongue or something, but I'd like to make a differentiation between what dollar cost averaging is in my opinion, and sometimes when I think it's misused a little bit inappropriately.
So if you, for example, are investing in your 401k, I mean every month it's coming outta your paycheck, I would call that periodic investing, that just investing early enough in normal investing dollar cost averaging is a specific decision to break up a lump sum and spread it out over a period of time.
And so for example, let's say you've got an inheritance of $120,000 cash, you could break it up into 12 pieces of $10,000 and invest $10,000 a month for 12 months instead of just dumping it all in at once. And so that is what I consider dollar cost averaging as opposed to just periodic investing, which is just normal monthly investing.
One note on dollar cost averaging is I would never recommend doing this if you were transferring accounts or rolling over an account. So for example, let's say you have an old 401K that's invested with your previous employer and you rolled over to a rollover ira, that is not an opportunity for dollar cost averaging because that money has already been in the market.
Keep it in the market if you pull it out of the market and then dollar cost average back into the market, that in my opinion would be a form of timing the market because why now are you pulling it out of the market and slowly getting back in?
So if you're ever just converting between accounts or doing anything else that's moving money around that already is in the market, leave it in the market. You know, that's not really an opportunity to dollar cost average, but let's say you do receive an inheritance or sell a property or something like that, I think it's perfectly reasonable to feel in your gut a fear about dumping all of that money directly into the market. I have felt that fear myself.
And so to analyze this, I actually did another little re a little bit of research and I again downloaded the past 150 years of the stock market and I looked at how you would fare if you were dollar cost averaging versus lump sum investing. And so I looked at investing over a 20-year period and either dollar cost averaging over a 12-month period.
So you spread it out over the first year and then hold it for the remaining 19 years or you just dump it in on day one and hold it for 20 years. And it turns out when you compare those two options, lump sum investing wins 71% of the time. So if you look at the past 151 years or 150 years of the stock market, lump sum investing wins 71% of the time. And it turns out they're pretty close because the big difference between those two is really the 19 years that follows.
Now whether you're spreading out over the year or not, you know, lump sum or sorry dollar cost averaging can win sometime. So for example, if you got an inheritance on January 1st, 2000, you would've been better off dollar cost averaging as the market fell during the.com crashed. But you know, it wouldn't have really made that much of a difference.
Which one should you do? Well, you know, I think it really depends on your gut. So for example, last year during the pandemic in May of 2020, I actually sold a property and had about $600,000 of cash and I wasn't planning to buy another property with that.
So I wanted to put into the market and I decided to dollar cost average, I went against the odds, I went for that 29% where I thought, hey, this is a crazy time. We are in the middle of this super volatile pandemic, the market's up and down, who knows what the future's gonna hold. I decided to spread that out and I think I did only over six months because I know the longer you spread it out, the less likely dollar cost averaging is to win. So I spread it o out over six months and guess what happened over the next six months?
The market went straight up. So I was actually worse off dollar cost averaging. I was a victim of the odds, you know, that was one of those 71% of the months where I would've been better off lump summing it in.
But that said it's very, very close and I actually have a calculator on my website, it's a dollar cost average versus lump sum calculator and you can put in the number of months you choose to dollar cost average and the time period you're planning to invest and it shows you historically which one would've been better and how much each one would win by. And it turns out they're very, very close.
And so if dollar cost averaging makes you feel better, if it makes you feel better, slowly get into the market, then I say go for it. Because you know, what you don't wanna do is put all your money in the market, have the market drop by 20% and then panic and pull it out and make a really bad decision with timing the market.
We're gonna miss the games. And so, you know, it can definitely be mentally much easier on yourself if you solely move to the market. That said, historically, statistically you're better off throwing it all in lump sum. So if you have the stomach for it, I say go for it. If you wanna play with this even further, I have yet another fun game on my website. It's called the Time the market Game.
And I think you can actually just Google time, the market game and my website personal finance club.com is the first hit and it basically lets you, it picks a random, I think like 10-year period, it lets you buy and sell as much as you want during that time 10 year period as you watch the live market, like go up and down and you can see if you can predict the drops and you can sell it at the, you can sell high and buy low or do your best to do it.
And it turns out that, you know, sometimes people win this game but they only win about 30% of the time and they lose about 70% of the time. And so you have to ask yourself, is that 30% lucky just like by randomly clicking or can you really time the market? And I think the more you look inward and the more you look at your past decisions, at least, at least that's what I do. I just decide the times that I have timed the market and one I've gotten lucky and like last year when I did a dollar cost averaging instead of a lump sum I lost and that was because I didn't know what was gonna happen.
Okay, so that wraps up our topic of the day about timing the market and the optimal strategy for timing the market. Hopefully I've made a convincing argument that investing early and often is basically your best option when you're deciding when to get into the market. Last year I did this when I guest-hosted the podcast, I had some questions from my Instagram followers and I'm gonna bring it back this year.
We have one question today, it's from Daniella from Palm Springs. And here is her question.
Daniella: How do you overcome the fear of investing? My husband and I grew up very poor and the thought of spending money investing instead of keeping it all in a savings account is terrifying for us.
Jeremy Schneider: Well hi Daniella, thank you for the question and I feel for you, you know, investing can be a very scary landscape to dip your toe in for the first time. You know, I think just pop culture associated with investing, you know, like Dogecoin and GameStop and guys on Wall Street frantically waving pieces of paper over their head, shouting, buy and sell and it just feels like gambling that's played by these like big stakeholders and how could you possibly get into it?
And so like I feel you like that, it's a crazy thing to get into and, but what I would suggest to you is that all that craziness when you say you're afraid of losing all your money, that is all noise, that is all nonsense. Real investing is all about buying assets that provide income and go up in value over long periods of time.
And so you're not making a bet, you're not gambling, you're not guessing, you're just simply buying something that provides value and you're holding it for long periods of time. And there might be some volatility along the way, you know, maybe six months from now someone's willing to pay you a little bit less than you paid for it, but that's okay because you plan to hold it for long time.
And so what you do, the first thing I would say is to educate yourself. Listen to this podcast is an excellent start by the way. another book I might suggest is The Simple Path to Wealth by Jayla Collins. He really does a great job breaking it down nice and simply. The exact things that we talk about on this podcast buy and holding this like really common sense investing.
And I think once you read a book or two or start listening to some podcast, you start to see, you know, it starts to cut through the noise about all that stuff I talked about the scary stuff. And you start to see, okay, wait a minute, this is actually a pretty simple thing to do, buy and hold for the long term and let the investments do the work. So the first thing I say is do to educate.
And the second thing to do is just to get started. Very small. And so the cool thing about investing is that you don't need to put your entire life savings on the line right at the beginning. And so we just talked about time in the market and dollar cost averaging, but if you were afraid to get in the market, just start with a tiny amount of money.
Like let's say, you know, it depends on, you know, your personal bank account and stuff like that, but like let's say maybe a hundred dollars per month for a year. So you take a hundred dollars per month and you could go and open, you know, a Fidelity account or a Schwab account or an e-trade account or whatever and just put a hundred bucks a month in and buy some index funds.
So Fidelity for example, offers $0 minimum index funds and you can just put a hundred bucks a month, you can buy those index funds. And what's gonna happen is after the first month, you're gonna see a hundred bucks in there and it's gonna change a little bit. It might be 103 bucks or it might be 98 bucks. And then the next month you put another a hundred bucks in there, then maybe it's 210 bucks and then you're gonna, after the year's up, you're gonna have put 1200 bucks in, but your balance will no longer be 1200.
It's gonna be something, you know, slightly higher, lower, you know, if the market's up 10%, you know, the historical average, you'll have made 120 bucks. You know, not quite that because you didn't put it all in the beginning of the year, but you, you get what I'm saying, it's gonna go up or down. I think it's gonna start to just watching that and getting a sense of it and being able to log in and see that your money's still there and see that nothing crazy's happening and it's not all disappearing.
You can take it out if you want, if it's a regular brokerage account, I think that's gonna get you more comfortable than maybe next year you start doing $200 a month next year you start doing $300 a month and you start ramping that money up and then you're gonna start building some real positive wealth.
Thank you Daniella, for the great question. I know you can do it. I'm proud of you for getting started.
That is it. That is all I have for you today. For the links and resources I mentioned in the show. You can head to youstaywealthy.com/111. Thank you for bearing with me as I try to fill Taylor's very large podcasting shoes.
Now I'll leave you today with my two rules of building wealth. Rule number one is to live below your means and rule number two is invest early and often. See you next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.