Tiffany, Brittney, and Sarah invested $200 a month in an S&P 500 index fund for 40 years. Strictly buying and holding while reinvesting dividends, they all used different times to jump into the market. All three went through five (now six) market crashes. Who was better off after 40 years?
Tiffany Top
Tiffany has the worst market timing. She saved her $200 a month, waited, and invested when she felt good, which turned out to be right before each crash. She would invest and instantly watch her investment lose 20-30%.
Brittney Bottom
Brittney was nearly perfect. She saved her $200 a month, waited, and invested at the bottom of major market downturns, pulling off a practically impossible feat.
Sarah Steady
Sarah was a bit different. She set up her account, invested $200 a month for 40 years, and never looked at it again, investing throughout all the ups and downs. When she retired, she got online access and glimpsed at her balance for the first time.
Results
Each of these friends invested the same $96,000 over their lifetime.
Tiffany ended up with $764,020.
Brittney ended up with $1,128,332.
Sarah ended up with $1,336,329.
What is most intriguing about this scenario is that it’s just simple math based on the stock market returns over 40 years–no tricks or wild assumptions. One assumption to point out is the 3% savings rate given for money waiting to be invested. This is generous and still not enough to beat Sarah.
This could easily be used to promote the great benefits of dollar-cost averaging, which is the accomplishment of a lower price per share paid on average for a stock or fund because of a regular, systematic investment. That’s a whole other topic worthy of its own time.
A great takeaway from this story is the attitude investors should have toward investing. Think for a minute how often we worry about timing the market: when to get out, when to get back in, and the right time to invest. What becomes paramount over time is consistency, patience, and diligence.
Listen to a deep dive into Market Timing vs. Time in the Market on the Power Up Wealth podcast.
Credit: Schneider, J. (2019, June 1). How to Perfectly Time The Market [web blog]. Retrieved September 16, 2022, from https://www.personalfinanceclub.com/how-to-perfectly-time-the-market/.
Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results.
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