Should I invest now?! Or at X price?! (Yes, but also it doesn't matter)
Recently I have been getting many questions with regards to the recent market crash (https://en.wikipedia.org/wiki/2020_stock_market_crash), of course the most popular being
"When is the best time to invest?!"
Truthfully? Using the power of hindsight I can easily tell you it's 23 March 2020, where DIA is trading at $186.13, and it is approximately up 30% now. But yes we all know basing investment performance based on hindsight is bullshit, the key is now.
So here's the tip I am going to give you, in the slogan of Nike, Just do it! Whether you buy at the lowest low or now, it is not going to matter in the long run, because we are going to be dollar cost averaging (DCA)!
I love data, it's picturesque, it's informative, it's amazing. Here I am going use very simple data to tell you why timing doesn't matter as much as you think. In the following scenario, these are the assumptions I used to reflect as much of reality as possible, for me at least,
An arbitrary investment of USD1000 per month
An arbitrary investment history of 15 years. This is to partly capture the impact of the 2008 GFC and other economic cycles.
A 30% withholding tax on dividends because we are not US citizens.
Dividends of ~2.78% (https://www.macrotrends.net/stocks/charts/INDU/dow-jones-industrial-average/dividend-yield-history)
A yearly investment increment of 2%, because inflation right.
As you can see, we didn't really invest in a very good or very bad time, pretty good place to start.
Let us see how bad things get during 2008, which by all comparisons, is REALLY bad.
Prior to the crash, you would be seeing a handsome 10% cumulative growth year on year, with about 22% gain in just 2 years, pretty great! Of course if you manage to sell it all then, good for you, but if you held to the crash to the lowest...oof you lost 33.6% at your lowest point. Not the worst given the market dropped 50% from 14k to 7k, why did you lose lesser than the market? Because you're smart and did DCA instead of trying to time the market. From another perspective of CAGR, it is only a -10% year on year drop.
Alright so your portfolio is down 33% at one point, let's take a wild guess how long would it take for you to breakeven.
1 Nov 2009. Yes, just slightly over half a year.
How's that possible? The market fell from 14000pts and it is only at 10000pts?? DCA. Also, your investments no longer goes into the red after August 2010. Note that this is only 5 years after you started your investments plan, and there's a global financial crisis smack right in the middle of it. Let's reiterate,
5 years
Global financial crisis
Didn't lose money anymore
Perhaps now is the best time to expand your (investment) horizon. Time in the market > Timing the market. Alright let's see that crises we got for the next 10 years since 2010.
I am sure there are others but you get my point. Oooohhh but there wasn't a pandemic tho?! Yes I know that, but Covid-19's mortality rate is like 5%, 10% if it's f-ing horrible with no healthcare at all. If the whole world is infected, we will replenish our population in less than a decade because 'population in the world is currently (2020) growing at a rate of around 1.05% per year' (https://www.worldometers.info/world-population/) Nobody's going anywhere okay.
So, let's fast forward a decade from 2010 and see how you would be doing.
At this point, I would like to bring your attention to the last column again, where it shows your cumulative growth rate of your investments. Notice how it fluctuated from approximately 5.4% to 3.7% at the worst month? (or probably 3% at the lowwwwwest day). This means that as long as you continue putting in that ~1k odd every month, your money is returning you at least 3% year on year for all the years, and that is at the lowest month of a freaking global pandemic crisis, where the market dropped about 22% from the peak.
I am not going to focus on your CAGR ROI at it's peak because we know that is just cherry picking, so let's see the average of the past 5 years from 2015-2020 - 4.8%. Right now, people who invested 15 years ago and simply stuck to a monthly plan got 4.8% returns year on year with their money, translating to a nice 0.4% monthly.
How many of you, sitting on your cash, are confident that you can beat the market 4.8% (Maybe 2.8% if your deposits account pays 2% interest) per year of you sitting on your money? The market isn't that high or low now to be frank, somewhat of a middle ground, exactly the situation 15 years ago, see below if you need some reaffirmation.
As you can see, the red boxed out channel shows that the entry is kinda similar, with some prices higher and some lower, in fact currently it is still on the lower side, which is good.
Conclusion
If you purchase the Dow now, I can definitely tell you I have no idea how your investment will look like 1-2 years from now. However, 5 years from now, I am confident it will not be in the red. 15 years from now, you will definitely be better off than sitting on your cash the whole time. So by now I am sure you have the answer to your question, should you invest now?
Some of you might know that I had projected a 5% CAGR as my worst case scenario for portfolio growth. With this, you can really see why I said 5% is extremely conservative. I believe investments is for everybody. 5% is possible for everyone.