Despite having a plan in place, I sometimes find clients sitting on relatively large amounts of cash that should be invested. Why hold off? They're waiting for a better time to invest, which usually takes the form of a big market plunge that makes stocks relatively cheaper. This brings up the question: are you better off waiting for the right time to invest or just plunging in? Let's look at various periods of time to develop an answer.
For our hypothetical stock portfolio, I will use the DFA Equity Balanced Strategy Index. To simulate the return on cash, I'll use the One-Month Treasury Bill Index. Data on both indexes are available all the way back to 1970, so we have plenty of periods to review.
Over all one-month periods, stocks have outperformed cash 63% of the time, by an average of 0.7% per month.- If we look out 12 months, we find stocks outperform cash 74% of the time, by an average of 10.5% per year.
- Looking out three years, the persistence of stock outperformance grows even larger, to 86%. The average annual outperformance is 9.2% per year.
- At the five year mark, stocks beat cash with great regularity. Stocks outperformed 93% of the time, by an average of 9.2% per year.
The odds that you'll be better off waiting in cash for the right time to invest is never good and drops precipitously the longer you wait.
What if stocks have been way up in the last 12 months?
I hear all the time that "stocks are too high" or "I don't want to chase prices." Looking at the data, it doesn't matter. If I look at every 12-month period when a diversified stock index portfolio beat cash by 20% or more (double the long-term average), the next 12 months tends to be persistently positive and the average gain for stocks relative to cash is +9.1%, only slightly less than the +10.5%
What if stocks have been way down in the last 12 months?
Investors will claim they want a bargain when buying stocks, but when the time comes, plummeting stock prices often correspond with dire economic forecasts and depressing headlines. In my experience, most investors lose their nerve when opportunity strikes. That's a shame because recent stock losses have been a reliable sign of better times ahead.
Instead of trying to time the market, I suggest investing when you have the funds available and only selling when you need the cash flow for spending purposes. The odds strongly favor "plunging in" with available cash, and the odds only improve the longer the time frame we look at.
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Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.
