Investors try tirelessly to answer a simple question: what is the right time to invest? Our analysis shows that if you invest each year and over the long term, it is better to invest as soon as your money is available regardless of the market environment.
When you ask your friends whether it is the right time to invest, everyone has his own opinion and approach. Some may suggest to invest when the market is trending up, others when it is trending down, some may advise to follow a systematic approach and spread the investment over time, others may recommend to wait until after the next crisis. In short, you can hear everything and its opposite, it is hardly possible to form an opinion, and you end up there still wondering whether to invest now or later. But at some point, you will have to get started. Is there a simple rule to invest at the right time?
In order to identify the best approach to time your investment consider 5 investors, each receiving €5,000 on January 1st of each year. Our guinea pigs must invest that amount in a diversified basket of global shares over the coming year and are free to implement the approach that seems most relevant to them. Let's discover what they have planned.
Mr. Marabout is an exceptional being. He has, among others, a supernatural gift that allows him to predict future movements of the stock market. This ability allows him to invest at the end of the lowest monthly close of the year: the best time to invest.
Mr. Direct is rather pragmatic. He does not follow the market, is well aware of the limits of his knowledge and really doesn’t want to bother trying to figure out the best time to invest. Thus, he decides to invest his money as soon as he receives it, on January 1st of each year.
Mrs. Average is an arithmetic teacher. She is very structured and believes in the magic of numbers. She therefore applies a systematic approach, divides in her kitty by 12 and invests one-twelfth the first of each month.
Mr. Dumber, is passionate about stamps and highly suggestible. He feels confident when markets are rising and when everyone talks about their good investments during dinner to which he is invited. This approach led him to systematically invest at the end of the highest months of the year: the worst moment to invest.
Finally, Ms. Belgian is cautious and does not like the stock market. All her friends have lost money in the Internet bubble or with Fortis. She loves her savings account and is convinced that a crisis is just around the corner. So, she decides to keep her money on a savings account and never dares invest in stocks.
After 15 years of experiment, the game is over and all players show the money they have collected. Each investor has invested a total of €75,000 over the period. But who generated the best performance?
Not surprisingly, Mr. Marabout had the best return, collecting €127,000 in total. The question one may ask is whether a random street investor can reasonably expect to achieve the same result without having Mr. Marabout’s clairvoyance, just by following his own convictions. I would probably have more luck at the lottery.
Mr. Direct ends second of the experience with €119 000, only €8,000 less than Mr. Marabout over 15 years. He had no exceptional gift and didn’t implement any specific strategy. He just invested his money as soon as it was available, without thinking much further.
Mrs. Average arrives third of the race, not far behind Mr. Direct with €118,000. She is defeated but her approach has some merit and almost as effective as investing directly.
The most astonishing result is undoubtedly that of Mr. Dumber who, despite his poor intuitions and his bad luck, did not come out so badly compared to his peer with still €110,000.
The worst off of our companions is Ms. Belgian who has set aside only €84,000 in 15 years, as her savings account yielded only 1.5% per annum.
This experiment is rich in lessons for financial investors who are saving every year. The example of Ms. Belgian and Mr. Dumber demonstrates that, in the long term, it is clearly better to invest your money at the wrong time rather than to never invest in stocks and keep your money on a savings account. Above all, Mr. Direct shows that it is not necessary to do big analysis to invest in stocks wisely. If you save money each year over the long term, it is simpler and more effective to invest as soon as the money is available, regardless of the current level of the market. Stocks tend to rise over the long run, this trend plays in your favour.
In a coming post, we will explain why it can still sometimes be interesting to follow the approach of Mrs. Average when investing significant amounts at a given moment, following inheritance or retirement for instance.
This analysis was conducted by easyvest based on data available on Bloomberg of the MSCI World EUR index monthly returns data from 2001 to 2015. The analysis assumes that each investor receives €5,000 the 1st of January and is free to invest that amount immediately or whenever wanted in the year.
Note: This article was written when Easyvest was authorized and regulated by the FSMA as an agent in banking and investment services.