WISE - Blog for March 2014 by Victoria Collins, Ph.D., CFP Founder, Invest In Yourself and Co-Founder of WISE
Three friends each put $5,000 into the stock market every year since 1960. Samantha was very lucky and managed to pick the best day of every year to buy. Jenny’s approach was easier and more consistent. She didn’t try to time the market but instead invested on July 1st each year. Meg, like Samantha did try to time the market, but unfortunately chose the worst possible day to invest each and every year.
You’ve probably asked yourself – is this a good time to invest or should I wait? That’s especially true when we face a geo-political situation like we are now with Russia, or we have concerns about interest rates rising or corporate profit margins being squeezed. The fact is no one – not even professionals – can tell you whether any one day, week or month is better than another to invest. The direction of the market is clear only after it happens.
An investment advisor will tell you to 1) determine just how comfortable you are with risk, 2) allocate or dedicate a certain amount of your funds to equities and to bonds and to diversify across those categories to further reduce that risk and 3) to not let emotions drive how you invest in either bull or bear markets. In other words consistency is key.
This was the clear message from both Laura Tarbox, CFP of the Tarbox Group and from Marilyn Blank, CPA who spoke on Tax Tips for Chicks at the WISE/WomanSage dinner on March 11, 2014. Their outstanding presentation gave us not only a wealth of information for our own taxes and investments but was entertaining and engaging as well.
How does consistency vs. market timing compare in real life? Surprisingly, Samantha’s, Jenny’s and Meg’s returns were pretty similar over time. Sam, with her good “luck” had an average annual return over all those years of 12.8% vs. Jenny’s consistent approach which produced 12.6%/year and Meg’s unlucky timing which gave her a return of 12.1%/year. Their friend Margo was very conservative and wanted her money to be “safe” so she invested her $5,000/year in treasury. Her funds grew over the entire time to less than one quarter of the consistent approach used by Jenny.