Schwab.com has a great article titled “Does market timing work?” published the middle of 2021 asking is timing the market or time in the market better?
The basic question is this, if you have come to some money and want to invest for a while, what is the best way to invest? Should you wait and invest when the market is at its low? or should you invest regularly without worrying about the market status?
A lots of ink has been spent on why time in the market is the best option instead of timing the market. Schwab’s article is one of the articles with some actual data in it. If you are curious about the answer, yes you might get more if you know when the market is at its lowest, but not that much. In fact, even investing at the worst time, i.e. when the market is at its peak and will drop off soon, gives more return than not investing at all.
Here is an attempt to ask the same question using the S&P 500 data as the Schwab’s article to get a better understanding of the results.
Performance of S&P 500 Index from 2001 to 2021
How did S&P 500 index perform over the last 20 years? Overall it rose from about 1000 points to 4500 with lots of ups and downs of varying degrees.
Investing at the best times: S&P 500 index’s lowest price
If we have an oracle to tell us (yeah… right?) what is the best time to invest, how much will we gain investing at the best of times. One of the ways to time the market is to look at the lowest point every year. And here is how the lowest for S&P 500 or best for investing looks like. On some years, it is early in the year and some times it is later in the year.
If we invest $2,000 at these best times to invest every year from year 2001 to 2021, here is how our investment would have grown. For example, $2000 invested in the best time in 2001 on 2001-09-21 would have grown to $9896 at the end of 2021. Similarly we can see that 2009 had the best return with $14127 for invest $2000 on 2009-03-09.
Our total return on investment at the end at the best time is $160,093.
Investing at close to the best times: S&P 500 index’s within 2 weeks before lowest price
In real life, there is no oracle to tell us the lowest point ahead. So, let us consider a scenario where we invest on a day (randomly chosen) within two weeks before the lowest price of S&P 500.
Clearly, we see some reduction in return. For example, investment $2000 in 2009 is still the best with returns around $12,300, about $2,000 less than investing at the best day.
Investing at close to the best times: S&P 500 index’s 2 weeks around lowest price
Let us consider another option to invest around the best day, this time on any day around two weeks not any day two weeks before. For example, if today is the lowest price day, we could have invested on a day that is within a week before or a week after today.
We see a similar returns as before, slightly lower than what we would have have got if we know the best day to invest.
Yearly highs of S&P 500 index
Let us consider the worst scenario, where we invest $2000 on the day S&P index is at the highest for the year. For example, in 2001 S&P index was highest on Jan 30 and we would have invested $2000 for that year.
And this is how each year’s return on investment on the worst day would look like. $2000 investment on the year 2000’s highest index would have returned us about $7000 at the end of 2021.
We can see that investing on the worst possible day, i.e. S& 500 index highest point, gives us reduced amount when compared to investing on the best day or around the best day. However, cumulatively we would have got $120,824 at the end of 2021 and it is not bad at all when compared to keeping the money in hand.
Investing in S&P 500 Index at first day of market each year
If you have the money at hand at the beginning of every year, why not invest it immediately. In this strategy, we invest $2000 on the first day of the market every year. This approach lets the money to be in the market for long time as possible. Here is how the investment of $2000 every year at this beginning would have turned out after 21 years.
Dollar Cost Averaging: Investing in S&P 500 Index at first day of every month for each year
Not every one can invest a lump sum every year at a specific time. Most common strategy is to split the money into equal parts for each month and invest the smaller portion every month. This is widely known as Dollar Cost Averaging or Systematic Investment Plan (SIP) and is what used in retirement plans like 401K. The biggest advantage of spreading the money over a year is that you can benefit from the market lows and also get protection from market highs.
So, what is the best strategy? Timing the market or Time in the market
So far we saw what happens to investment of $2000 every year, for different strategies. At the end we are interested in how much in total we get for these investment strategies after 21 years. This will help us choose the reasonable plan to help us.
Here is the total return at the end of 21 years for these 6 strategies. The upshot is that yes timing right at the dip gets us more money, but it is not that high. Given that there is no oracle to tell us right time to buy every time, Timing it is not really possible. As we all know, as (long as) the market keeps improving over time, even the worst timing that is the highest every year gives us a decent return from S&P 500.
And we can clearly see the benefit of Dollar Cost average that is investing every month gives pretty good returns.
- Timing right at the dip – Best timing: $160,092
- Within two weeks before the best day to invest: $152,433
- 2 weeks around the best day to invest: $152,364
- First day every month (Dollar Cost Average): $135,726
- First day every year: $135,633
- Investing right at the peak – Worst timing: 120,824
- Cash- Not investing keeping as cash : $42,000
Disclaimer: This post is great for educational purpose to get an idea of what kind of returns we can expect from S&P 500. A lot of caveats in the analysis and one of the things I am interested in analysing further is to repeat such analysis over many intervals. For example, this post considers the time window between 2000 to 2021, to get a better picture of the returns multiple overlapping time windows is needed.