In theory, timing the stock market to maximize your profits sounds great. If it all goes according to plan, you’ll buy stocks at just the right time and price, and then sell them at the right time and price to ensure the highest return.
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The problem is, things rarely go according to plan — even for the most seasoned investors. That’s why many investment firms and advisors warn against trying to time the market. One of those firms is Charles Schwab, which recently addressed the topic with an analysis from the Schwab Center for Financial Research.
Does timing the market really work? Read on to learn what Charles Schwab had to say about it.
Better Now Than Later
In its report, Schwab brought up the example of getting a year-end bonus or income tax refund and weighing whether to invest the money now or wait until you think you’ll get a better return on your money.
This might happen if the stock markets had recently hit high all-time highs (as they have lately). Should you wait until the markets soften and stocks are cheaper to buy?
The answer is probably “no” — at least according to Schwab. Its research found that the cost of waiting for the “perfect” moment to invest exceeds the benefit, mainly because timing the market perfectly is “nearly impossible.”
Schwab’s recommendation was to avoid timing the market and instead invest “as soon as possible.”
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Different Strategies
To illustrate its findings, Schwab laid out five basic investing scenarios and the likely results. In each case, the investor received $2,000 at the beginning of every year for the 20 years ending in 2024 and left the money in the stock market, as represented by the S&P 500 Index.
Here’s a quick look:
- “Peter” aimed to invest his $2,000 at the market’s lowest closing point each year, which essentially means timing the market perfectly.
- “Ashley” took a simple approach in which she invested her $2,000 on the first trading day of each year.
- “Matthew” adopted a dollar-cost averaging strategy. This involved dividing his yearly $2,000 allotment into 12 equal portions, which he invested at the beginning of every month.
- “Rosie” had the bad luck to invest her $2,000 each year at the market’s peak.
- “Larry” opted to leave his money in cash investments rather than put it into the stock markets.
Even ‘Perfect’ Timing Isn’t That Beneficial
So how did each investor do? Here’s what Schwab found:
- Peter had the best results, eventually accruing $186,077 over the 20 years. But again, he had to time the market perfectly every year, which is all but impossible in the real world.
- Ashley came in second with $170,555 — only $15,522 less than Peter — using the simplest strategy.
- Matthew’s dollar-cost-averaging approach netted $166,591 at the end of 20 years. This was mainly because in a typical 12-month period, the market has increased more than 75% of the time.
- Even though Ashley had the bad luck to invest at the top of the market each year, she still had a return of $151,343 because of the market’s steady growth from one year to the next.
- Larry’s return was by far the lowest at $47,357. The interest from his cash investments simply couldn’t keep up with the stock market’s much stronger return over two decades.
Based on the above results, Schwab concluded that timing the market is too difficult for most investors — and doesn’t net that much benefit, anyway. Instead, you’re better off investing immediately or at least using the dollar-cost averaging approach.
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This article originally appeared on GOBankingRates.com: Does Timing the Market Actually Work? Charles Schwab Weighs In
