World’s Worst Investor
Even if you have the worst possible timing in investing in the markets, you’ll still do pretty well. Furthermore, if you stick to your plan, you will likely do better than an investor who is constantly making changes to what they hold.
Meet Fred – he quite possibly has the worst market timing of any investor in the world. When Fred entered the workforce in 1970, he decided that he was going to put away $2,000 per year and that he would increase his contribution amount by another $2,000/year each decade until he retires (so $4,000/year in the 80s, $6,000/year in the 90s, etc).
The first couple of years, Fred put aside the $2,000 in his bank account and then at the end of 1972, he took the $6,000 he had accumulated and put the full amount in an S&P 500 index fund. Over the course of the next two years, the stock market dropped nearly 50% and Fred saw half of his investments “disappear”, at least on paper. The one thing Fred had going for him was that he decided to stick to his plan and not sell what was left after such a big drop.
Fear however had made Fred much more leery about the stock markets now so for the next 15 years, he just let the $2,000 (and after 1980, $4,000) per year build up in his bank account. In August of 1987, after watching many years of steady growth in the markets, he finally decided to put the $46,000 that had built up into the S&P 500 index fund as well. Shortly thereafter, the next big market crash saw his account value drop by 34%!
Although poor Fred had again invested right at the peak, he stuck to his investment plan and did not sell his index fund. He again became very fearful about the markets and let his new investments build in his bank account. In December 1999, he had built up another $68,000 and finally decided to make another purchase. Fred put this money into his index fund right before the tech bubble burst. This time, the market took a 50% downturn that lasted until 2002.
After investing at three of the worst possible times, he decided to give it one more go. In October of 2007, Fred put the $64,000 that had accumulated since his last purchase to work and shortly thereafter saw another 50% crash occur.
Fred finally decided to retire in 2013 after 43 years on the job. Every penny he’d invested over these years had never been moved out of the same S&P 500 index that he first started buying in 1972. He had managed to only put money in at the worst possible times of the preceding 4 decades yet fortunately he’d stuck to his plan and not allowed fear to sway him off course. After investing a total of $184,000, Fred’s account at retirement sat at $1.1 million.
Although Fred quite possibly had the worst market timing ever, his diligent savings plan and unwavering commitment to his goals allowed him to earn great returns over the course of his career and have a significant retirement nest egg built in the process. Had Fred dollar cost averaged into the market each year instead of waiting to buy at specific points, his portfolio would have been a full $2.3 million when he retired.
So what can you learn from Fred? Long term investing is about staying the course and sticking to your plan. Short term dips and losses are part of investing and the psychological pain that you may have to endure will pay off in the end. How you react to those losses will be one of the biggest determinants of your investment performance. Finally, you should remember that it’s time in the market, not timing the market, which will lead to long term growth.