Timing the Stock Market Example: Sam Only Invests at the Worst Possible Time
Channel: Daily Insight
Date: 28/02/2019

Sam is an American who is the world’s worst stock market timer — not through any fault of his own — he’s just unlucky, I guess. He started his working life at the age of 22 back in 1970. He made a plan to save up $2000 every year in the 1970s, $4000 every year in the 80s, $6000 every year in the 90s, and then $8000 every year up until his retirement at the age of 65 in 2013.

He saved up a total of $6000 in his first three years and decided to make his first investment in the stock market by buying into an S&P 500 index fund back in December 1972. (Yes, I know, there were no index funds back in 1972, but just play along!). Due to Sam’s awful luck, he unintentionally invested just before the stock market crashed by 48% between 11 January 1973 and 6 December 1974. He felt deflated, but refused to sell his shares in the fund as per his original plan.

He continued saving $2000 a year throughout the 70s and $4000 a year throughout the early 80s. He had been bitten once by the stock market, so was a bit hesitant to reenter. However, in August 1987, after saving up a further $46,000, he decided to invest more of his hard-earned cash in the same S&P 500 index fund. Unbeknownst to him, he had unintentionally invested at the peak of 1987, and the stock market crashed again on 19 October — the infamous Black Monday. His stocks went down 34%! He couldn’t believe his luck.

Once bitten, twice shy, Sam decided to hold off from investing for a while and continued saving money as planned. By the end of 1999, Sam had saved up a further $68,000. He noticed that the Internet was becoming a real thing, and decided that now was the time to invest. Unfortunately for Sam, the markets were in a bubble, the so-called Dot-com Bubble, which ultimately burst and sent the markets into a spiral between 11 March 2000 and 9 October 2002. He had only one thing to type on his new computer — WTF!? In total, the markets went down 49%. 

Sam was completely dismayed, and decided to give up on investing — at least in the short-term. As per his original plan, he didn’t sell any of his stock.

By October of 2007, he had saved up a further $64,000. He noticed that lots of people were investing in the stock market, and so decided to have one last go at it before his retirement in 2013. He put the full $64,000 into the same S&P 500 index fund and sat back and relaxed. But unfortunately for Sam again, he had unintentionally chosen the wrong time. The global financial crisis was upon us and his stocks fell by a whopping 52% over the next 17 months.

Sam accepted his fate and continued saving up until his retirement in 2013. He decided not to put anymore money into the stock market and resigned himself to the fact that he was the World’s Worst Stock Market Timer.

In total, he had invested $184,000 in the stock market. He actually ended up a millionaire with his stocks valued at over $1.1 million! How is that possible when he only invested at the worst possible times?

First of all, Sam made a savings plan and always stuck to it every year.

Secondly, he never sold any stock — not even one share, which allowed his investments to compound over the decades.

And lastly, he invested his hard-earned cash in a low-cost index fund. He kept things simple. He wasn’t paying fund managers to actively manage his fund. He just invested in a plain vanilla index fund.

If he had instead invested every year into the same fund, that is, taking advantage of dollar-cost averaging, he would have come out with over $2.3 million.

The point of this little scenario is that even with the worst possible timing, given enough years of investment, you can still make money in the share market.

The take-home message:

Save regularly. Every week, or month, put some money away which will only be used for investing.

Invest regularly. Whether that be once a month, or once a quarter, or once a year — it doesn’t matter. Invest no matter where the markets are. Dollar-cost averaging.

Invest in index funds: Buying single stocks can be very risky. A company could go bankrupt and you could lose all your money. But you can negate most of this risk by investing in low-cost, broad-market index funds. I personally invest in Australian ETFs (35% VAS and 65% VESG).

And finally, think long-term. Yes, in the short-term, markets fluctuate. But as an investor, you should always be thinking long-term. Over time, on average, the stock market goes up. As they say, “Time in the market is better than timing the market”.

Most of us are terrible at timing the market. So it takes a lot of courage to be an investor. If you’re constantly selling when other people are selling, you’ll end up losing. You need to put your head down, stick to your savings goals, and invest regularly.

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