Time in the Market
We’ve all heard the expression: “Its about time in the market, not market timing”. On the face it sounds really simple. You invest your cash, stay patient, reinvest the dividends, wait a fairly large number of years, and then you reap the benefits. As far as stock investing goes, it is the closest you will ever get to a sure thing, IMHO. One would think, if this is a tried and true formula to accumulate tons of cash, then why isn’t everyone swimming in money? I can point to a number of examples that show this is the easiest way to build wealth. I have many of my own examples but on a smaller scale. Just last week I posted an article detailing how one of my investments almost doubled my share total in just under 7 years (see Portfolio Spotlight). This is a good example of how staying patient and reinvesting dividends over a number of years, can really add up.
It stands to reason that since this method seems pretty well documented and is a proven way to build wealth, everyone must be well on their way to a comfortable retirement. Er…no. Not even close. Other then the blog community that really has taken to DGI investing (yay for us!), the average American is barely even saving for retirement. It is quite scary when you consider that people will have to work much longer as a result. SmartAsset wrote an article (read here) that states “According to the Census Bureau, the (median) average net worth excluding home equity for an American 35-44 years old is $14,226. In the 55-64 age range, average net worth is $45,447”. What ??? are you kidding me? I am not sure how that is even possible. I spend almost every waking moment thinking about my assets and how I can increase them. I am a bit off the deep end when it comes to retirement savings, but there must be a middle ground for most people.
What seems to be the problem when it comes to saving for retirement? Well, if I had to start with the single biggest reason I would say it comes down to “emotion”. Everyone remembers an economic downturn or a recession. I get it. It is hard to take your hard earned money, your security blanket, and plunk it down on stocks, hoping beyond hope that it will turn into something bigger and better. If you look at it on those terms, it can seem scary. The market has a bad couple of weeks and you are down 10-15%. That can be enough to make most shy away from ever trying it again. You get emotional, you panic, and you run… far and fast away from investing. Not the best way to earn for retirement.
Another possible reason is the instant society we live in. Many expect to deposit the money one day, and then wake up the next day and be rich. If that doesn’t happen, they say, its a scam, they are trying to steal my money etc … There is no patience anymore. Everyone wants to make money and make it as fast as they can. We have scratch tickets, twitter feeds from around the world, & 24 hour news. It is crazy how fast we know everything. Everything is right now!
Do you have what it takes ?
In order to reap the benefits of investing, one must stay disciplined and patient. It is about time in the market. Those are the two biggest factors to success. We all have momentary lapses and this is to be expected, but if you can focus and stay invested 80% of the time, the rewards are huge. This means, when the sharks are circling, you stick to your investments, despite the market swings, and reinvest the dividends.
Does this mean you never sell a stock? Absolutely not. Companies have problems and if you think it is a permanent issue, it is prudent to sell and find a better company. I would argue though that most negative news is overblown and after a short period of time, it is shown to be noise. I have one such examples from my own portfolio. Wells Fargo (WFC): I purchased this stock a few days before the news broke about their scandal. The stock went down immediately, but then rebounded a month later and I am in positive territory by a fair amount. I paid $48.65 / share for this stock. Since then I have collected 2 dividends and the share price is at $55.83 as of today. My Yield-On-Cost is 16.23 % in a 7 month time frame. Not too bad when you consider the situation. When the news broke, it was armageddon for the company. Things would never be the same and people were running from the stock in droves. This is just one example of how being patient, ignoring the noise, and sticking to the plan, paid off for me.
The stock just as easily could have tanked due to the negativity and I wouldn’t be able to use this as an example but I do believe there are a lot of naysayers that tend to skew the market. I always hear about a stock market ‘genius’ who predicted the last crash correctly. What you don’t hear is that he predicted a crash every 6 months over a 10 year period. Yes thats right, anyone who listened to him would actually have lost money. They would have sold everything, missed out on dividends, and all the years of price appreciation before the crash. Again, it is about time in the market. Timing is a fool’s game. Most of the time, even if you are off by a mere 6 – 9 months, you will still be worse off that someone stayed invested during that time. It is likely you lose out on a continued rally and dividend reinvestments over that time.
You only have to look at a stock market chart since before the Great Depression to see the obvious pattern. The market has an upward bias. Yes, there have been times where it took a few years to get back to levels it was previously, but if you stayed invested, continued periodic purchases and reinvestments of the dividend, you are much better off. When the market is depressed, you invest at a lower price, gather dividends, and lower your cost basis. Then when the market is back to pre-crash levels, you are way ahead. It really is that simple.
The only caveat to this method is that if you are near retirement, it can delay your plans. If you are within 5 years of hanging them up, I would go conservative and preserve the capital if possible. This doesn’t mean exiting stocks entirely, but going with solid dividend payers that have incredible stability (e.g. Dividend Champions). If you are a DGI investor as I am this means removing any more speculative non dividend payers and focusing on income paying stocks or bonds entirely. Most DGI investors don’t have any of these types of stocks but I do. I like to take about 5% of my portfolio and buy riskier stocks that I identify could be total game changers. It is just something I think is worth the risk . It really depends on your tolerance level and what your plan is.
Its about Time in the Market. Time is your greatest weapon in pursuit of retirement. It is not a get rich quick scheme but it is the surest way to achieve the gaol of FIRE. It can be really hard to stay patient over time and stick to your plan but it is the safest and most successful way to acquire wealth. One way I combat the urge to be impatient is to constantly monitor my portfolio. I get up every day at 6AM and look at my portfolio and update prices etc.. in my spreadsheet. This keeps me focused and I see progress on a daily basis. I stay connected to stock world and learn trends. I see dividend payments every month and see where I am at as far as progress towards retirement. Seeing the numbers change is motivation to stick with it. When we have down periods in the market if forces me to look at ways to increase the value by upping contributions and ensuring I am taking advantage of all avenues available to me. I am less reactive to market news when I am seeing the values go up on a daily basis.
Stay patient, stick to your plan and try to not reactive to negative market news without waiting a bit to see the impacts. Most of the time it is temporary and is a product of ‘traders’ who really want to see prices go up and down violently. Remember, there are a whole group of people on TV and on the internet who make money by talking about stocks and getting you to move money around in reaction to what they are saying. Good luck !