When you’re investing, there’s this ominous feeling that a drop in the market is ahead of us. Well here’s the bad news: There’s about a 75% chance that you’re right. I went back and looked at the last 100 years of S&P 500 stock market data. For any given month there’s about a 75% chance that the market will be lower during some future month.
Those are tempting odds. If we’re 75% sure the market is going down at some point in the future, why not sell everything, move to cash, wait for the market to go down and buy back in? Imagine we start doing that today. Today a share of VOO (The S&P 500 ETF) is priced at $475. Why not sell, take your $475 and wait for a lower price. What if tomorrow it goes to $474? It’s lower! Is that good enough? But it’s only a buck so might as well wait. What if it goes to $470? Now we can take $5… but maybe you can get more! BUT what if that is the lowest price we ever see again? You blew it and missed your chance!
Even though the odds are good (75%) the upside is limited. It’s however many bucks you can wait in that game of chicken before you buy back in. But if you miss your chance (or the 25% hits) the downside is unlimited. A share of VOO can easily double in value (like it did since 2019). Plus, while your money is on the sidelines you’re missing out on the dividends paid to owners. That’s free cash paid to you just for sitting there doing nothing.
Do I play this gambler’s game of timing the market? Absolutely not. I pretend my brokerage account only has one button: “Buy”. I buy low. I buy high. I buy buy buy and hold for decades to let the market do the work.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Jeremy
