Time Is Your Most Important Investment Asset
If you have the money to invest, what is stopping you from making more profit? Probably time.
You create wealth by investing money by keeping money in the market. If you give it up too early, you risk losing a significant amount of money over the course of your life. As James Royal writes for NerdWallet , “Your length of time in the market is the best indicator of your overall performance.” That’s why.
(Note: this does not mean “timing the market,” as if you were trying to place your bets at a time when it’s best to buy and sell. In fact, this is a terrible way to make money and you will probably always lose.)
Historically, the S&P 500 has brought in about 10 percent per annum excluding dividends, but that doesn’t mean you can invest one day and then cash out a year later and expect 10 percent more money. You need to stay in the market. Royal writes,
According to Putnam Investments, in the 15 years to 2017, the market was generating 9.9% per annum for those who remained fully invested. Anyway:
- If you only skip the top 10 days during this period, your annualized rate of return drops to five percent.
- If you miss your best 20 days, your annualized return drops to two percent.
- If you miss your 30 best days, you will actually lose money (-0.4% annually).
You cannot achieve only better days in the market “in time”. You overcome volatility and benefit from complex income and dividends. There is a reason everyone tells you to start earlier : the sooner you do it, the more money you are likely to get. Time is on your side.
So why are people missing out on benefits? As Royal notes, it all boils down to fear and greed. Fear is more or less a misunderstanding of the market – if, say, you were born in the mid-1980s and watched things fall apart when you left college in 2008, you probably don’t want to dump everything into the market. But waiting for the stock to start rallying — when the market is “safe” — is a terrible idea. There is no perfect time to invest other than a long time.
Greed wants things to be more interesting in order to surpass the returns of “average” investors. Because none of us wants to think we’re ordinary, right? But, as I wrote earlier , the building blocks of your finances must be boring: Invest in low-cost index funds, consistently, over time. If you want to invest in individual companies, first do your research and think about how the company will develop in 10 or 20 (or more) years.
Nothing is guaranteed, but investing in the long term – so the market has time to descend and recover, as always – will be the best strategy for most people.