Following a relatively sanguine period, fixed income and equity markets came under increased pressure in 2022 due to spiking inflation, rising interest rates, and geopolitical tensions. 

Given all the uncertainty, many retail investors may wonder whether now is a good time to invest in the markets. This article examines different approaches to timing the market, the potential risks involved, and the reasons many retail investors continue to try to time the market.

The Schwab Center for Financial Research has published research showing that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even ideal timing.1 To highlight this, they examined the investment performance of five hypothetical investors, each receiving $2,000 at the beginning of each year for twenty years. From 2000 to 2020, the investors could invest those funds at any time during the year into the S&P 500 Index. 

• Test subject 1 invested their funds perfectly (i.e., when the Index was at its lowest point each year)
• Test subject 2 invested the funds at the worst time each year
• Test subject 3 invested the funds at the beginning of each year
• Test subject 4 invested the funds evenly throughout each year in monthly instalments at the beginning of each month
• Test subject 5 left the funds in treasury bills while waiting for better opportunities to emerge

After twenty years, the results were striking!

FIGURE 1

Source: Schwab Center for Financial Research. Invested $2,000 annually in a hypothetical portfolio that tracks the S&P 500® Index from 2001-2020.

Their ending portfolio value of even for the investor who timed their annual investments perfectly was only approximately 12 percent greater than of those who invested their funds in an automated fashion (by investing the entire amount at the beginning of the year or through monthly recurring contributions). The unlucky investor who invested their funds at the worst time of the year underperformed the two “auto-pilot” investors by only 10.1 to 10.6 percent over the twenty years. While it is unsurprising that investing in the S&P 500 over twenty years outperformed cash, even the investor with the worst timing still ended with a portfolio value over 2.7 times greater than the investor who never invested their funds. Schwab ran this analysis across rolling twenty-year periods going back to 1926, and these results stayed overwhelmingly consistent, further confirming the steep costs of delaying investing.

These results clearly illustrate that, to build wealth over the long term, investing your funds promptly—even if there is no “dip” to buy into—generally delivers far better results than remaining on the sidelines and waiting for the “right” time to invest. The chart below from Capital Group shows that, across decades, there will always be events and market conditions that may make investors feel hesitant to invest their funds.[1] However, over the long term, remaining

Status quo bias is an emotional bias in which people choose to do nothing (i.e., maintain the “status quo”) instead of making a change, even when change is warranted. Regarding market timing, because retail investors may be biased toward doing nothing, they may avoid investing their funds for extended periods. Regret-aversion bias is an emotional bias in which “people tend to avoid making decisions out of fear that the decision will turn out poorly.” In the context of market timing, investors may regret missing out on investing their funds when markets are relatively weak. Figure 3 below shows that markets typically stage strong recoveries after entering bear markets. Furthermore, Figure 2 above demonstrates that there are almost always events in the news that make investors fearful of investing. If investors “miss the dip” or if market conditions have been relatively benign, investors may postpone investing their funds until “ideal” buying conditions, which will likely never arrive. As with investors impacted by status quo bias, the consequence of this would be that considerable amounts of time may pass before the investor invests their funds. We can see that the costs of delaying investing are steep.

FIGURE 3

Source: Dow Jones Market Data

Source: Rattner, Nate and Ming Li. “How the S&P 500 Performs After Closing in a Bear Market.” Wall Street Journal, June 14, 2022.

To address emotional biases, retail investors may be better served by investing in a manner that reduces investment decision-making and the tendency to try to time the market. From the Schwab Center for Financial Research’s analysis, we learned that the hypothetical investors who invested in an automated way performed much better than uninvested investors. Fortunately, today, most trading platforms allow investors to set up systematic investment plans to easily invest their funds automatically in a recurring fashion. If investors stay invested for the long term and through periods of volatility, observing how global equities have performed over the last several decades, they would be well positioned to earn strong returns. 

¹ Schwab Center for Financial Research. “Does Market Timing Work?” Charles Schwab, Accessed December 10, 2022. 

² Capital Group. “Braving Bear Markets: 5 Lessons from Seasoned Investors.” Capital Ideas, September 27, 2022. 

³ Pompian, Michael. “Portfolio Management.” Behavioral Finance and Investment Processes. Refresher Reading, 2023 CFA Program, 2023, p. 21.