Are profits in the market a matter of luck or timing?
Charles Schwab, an investment company, studied the effects of timing your investments and how this may affect their success. They divided various types of investors into five “characters” with different names, and each one invested $2,000 each year over a twenty-year period:
- Peter Perfect was the perfect market timer. He always knew when the markets hit their lowest point, and this was when he would invest. From the beginning of 1993 until the end of 2012, he timed his investments perfectly.
- Ashley Action didn’t time anything. Whenever she received her $2,000, she would put it straight into the market.
- Matthew Monthly divided his $2,000 into twelve equal portions that he would invest at the beginning of every month, following the strategy of “dollar cost averaging.”
- Rosie Rotten had no idea of market timing whatsoever, and she would always invest $2,000 at the market peak (as opposed to following usual investing thinking of buying low).
- Larry Linger didn’t invest his money in the markets at all. He left it in cash investments (Treasury bills), since he was always looking for a better opportunity. Since he always preferred to wait, he ended up doing nothing.
Whose investments performed the best?
Peter Perfect who netted $87,004. His perfect timing meant that he never got it wrong. But who was next?
Interestingly, this was Ashley Action, who gained $81,650 after investing straight away, regardless of what was going on in the markets. Not far behind her was Matthew Monthly, whose dollar cost averaging brought him $79,510. Surprisingly, the biggest loser was not Rosie Rotten. Despite her poor understanding of market timing, she still managed to make $72,487. The one who made the least money was Larry Linger, who only made $51,291.
Don’t try to be perfect
Although it would be wonderful to be Peter Perfect, and be able to time the market, Peter Perfect is an entirely fictional character. Real investors (and even complex computer algorithms) cannot always time the market perfectly.
The best most of us can hope for is to make steady profits through compound returns. Of course, past performance doesn’t guarantee future returns, but as the results of Larry Linger and Rosie Rotten also demonstrate, “nothing ventured, nothing gained.”
Ashley Action’s achievements are within the reach of most people. By simply investing her money straight away, she made a fair profit. She didn’t try to time the market and she didn’t leave her money in cash for too long. She benefitted from the growth accrued from the time that her investments spent in the market.
In chess, it’s often these small, steady moves that lead you to win, rather than dramatic sweeps. This is also true of investing. Help yourself with gradual steps, without worrying about perfectly timing the market, and hopefully you will reach your retirement goals.
Read this to find out more about why you don’t need to be perfect to be a successful investor.