Many people are searching for the “perfect” time to start investing. To be honest, the perfect time to start investing was right when you were born. However, if you (or your parents) were unable to do that, then the best time to invest is NOW. It does not matter when you are reading this post, the answer is still the same. Does it matter that the stock market just hit an all time high and a bear market is looming? NO. Does it matter if the market is currently careening downhill? NO. Does it matter that a new president is in office? NO again. The only thing that matters is that you start investing NOW. Here are 3 reasons why you should start investing ASAP:
1. You are Investing for the Long Haul
If you are investing for retirement, then you are investing 10-40 years into the future. It does not matter what the market does in the next month, year, or even several years. The only thing you care about is the long-term trend. Over the last 100 years , the S&P 500 index (a broad measure of stock market performance) has averaged approximately 7% return per year, adjusted for inflation. Some years are up and some are down, but overall, the trend is up. Here’s what it looks like:
Although the year-to-year return can be quite variable, the longer your investment time horizon, the more likely you are to enjoy a positive return. As the chart below shows, if you hold a diversified portfolio of stocks (such as a total stock market index fund) for greater than 10 years, there is essentially no chance that you will lose money. Of course, past performance is no guarantee of future performance, but if the stock market did not eventually go up, no one would invest and our economy would collapse.
2. You Can Not Predict the Short-Term Direction of the Market
For those who were investing in the late 2000s, you recall that the stock market lost 50% of its value from October 2007 to March 2009. If you were able to predict this decline and invest at the bottom in March 2009, you could have taken advantage of 60% returns that year.
Unfortunately, very few (if any) people are able to accurately predict the short term direction of the stock market. Over the last 30 years, the average stock market investor (who presumably tries to time the market) earned a rate of return 7% less than the average return of the S&P 500.
What’s that? You’re not average? You think you can time the market? Excellent. Track your returns for the next 10 years, then come here and post about how you beat the S&P over the last 10 years. I’ll be impressed, and you’ll be on your way to becoming the next hedge fund manager. However, something tells me that I won’t be hearing from you. Even Warren Buffet, one of the greatest investors of all time says:
“People that think they can predict the short-term movement of the stock market — or listen to other people who talk about (timing the market) — they are making a big mistake.”
It turns out that time in the market is more important than timing the market.
3. Inflation will Slowly Erode your Savings
If you decide NOT to invest and instead park your money in a savings account waiting for that perfect time to start investing, you WILL slowly lose money due to the effects of inflation. The average annual inflation rate is 3.2%, but it has historically increased above 10% at times, which means that your money is able to buy 10% less goods and services each year.
Although today’s inflation rate is relatively low at 2.1%, you are still losing purchasing power every day your money is not invested. Even if you have your cash in a high-yield savings account that returns 1% currently, you will still essentially lose 1% of your money per year. Not a great plan to build wealth and earn your freedom.
Stop worrying about when to invest, and start NOW. After all, the market consistently marches upward over time, you can’t time the market (even if you think you can), and if you don’t invest now, inflation will erode your savings. In future posts, we will demystify HOW to invest. Hint: It’s not complicated and you can do it yourself without a financial advisor.
What do you think? Are you able to time the market? Are you waiting for the bottom of the next bear market to invest all your saved cash? Comment below!