In this article, we explore the experiences and fortunes of five hypothetical investors using five simple investment strategies over a 22-year period (Jan 2001 – Dec 2022) in the Australian market. Each investor received $2,000 annually and invested it as follows:
1. Lucky Luke: He had a remarkable talent for timing the market perfectly, investing at its lowest point each year. Whether through skill or luck, he achieved what most professionals couldn’t. For instance, instead of investing in January 2001, he waited until 24 September, the lowest closing level that year.
2. Rapid Ruby: Too busy to delve into market news or timing strategies, Ruby invested her $2,000 on the first trading day of each year.
3. Steady Sam: Aware of long-term market returns but cautious about potential downturns, Sam adopted a dollar cost averaging (DCA) strategy. He divided his $2,000 into 12 equal investments, made at the beginning of every month.
4. Hopeless Henry: Like Lucky Luke, Henry attempted to time his investments, but with poor results. He consistently invested at each year’s market peak. For example, in 2001, he invested on 29 June, the highest point of that year.
5. Hesitant Hannah: Fearful and indecisive, Hannah never invested her money, keeping it in her bank account with minimal interest.
The results of their strategies, depicted in the chart below, show the accumulated value of each investment by the end of 2022.
(For illustration purposes only)
Unsurprisingly, Lucky Luke’s perfect market timing placed him first, though it’s an unrealistic achievement. Surprisingly, Rapid Ruby, who invested without market timing, came in second, just $13,125 behind Luke.
Steady Sam’s DCA strategy secured him third place, $3,087 less than Ruby. This result can be partly attributed to the long-term upward trend of share markets, meaning he missed out on gains from investing the entire sum at the start.
Hopeless Henry’s unfortunate market timing left him $14,927 short of Ruby, who didn’t even consider market timing. However, Henry still accumulated more wealth than if he hadn’t invested at all. Ironically, Hesitant Hannah would have been better off investing at market peaks, which she feared.
To ensure these findings weren’t coincidental, we analyzed 24 separate 20-year periods dating back to 1980, and the rankings remained consistent. Perfect market timing always yielded the highest returns, immediate investment outperformed DCA, and poor market timing was better than not investing at all. This pattern persisted across various time frames, even 30 and 40-year periods.
Key lessons from this study:
1. The cost of waiting to invest is high. Make a plan and be decisive. Market timing’s benefits may not justify the effort, and a structured investment plan, regardless of market conditions, is more effective.
2. Dollar cost averaging overcomes psychological hurdles but sacrifices returns. Investing immediately has proven to be financially superior, but DCA may be suitable for risk-averse investors or those prone to regret during market declines.
3. Over the long term, bad market timing still outperforms not investing. It’s time in the market, not market timing, that leads to successful investment strategies.
While aspiring to be the next Lucky Luke is unrealistic, disciplined investment strategies and a sufficient investment horizon can yield positive outcomes without the stress of market timing. Data shows that even half of the professional stock pickers underperformed the benchmark over a year, highlighting the difficulty of perfect market timing. With patience and a well-thought-out approach, investors can achieve success without the pressure of timing the markets.
If you would like professional finance advice on when is best to invest, please contact the team at Shakespeare Financial Services for information.
DISCLAIMER: This publication is intended to provide general information only and does not purport to make any recommendation upon which you may reasonably rely without taking further advice. This publication does not take into account any person’s financial objectives, financial situation and particular needs and you should seek personal financial advice before acting on any information provided.
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