When to Buy Stocks? Time Value of Money Can Help
My oldest daughter started kindergarten last week, and now I finally get it - time really does go by too fast. What happened to my baby? How can she be old enough to march off to school without even kissing her mom goodbye?When it comes to watching kids grow up, time can feel like your enemy. Fortunately, when it comes to investing, time can be your best friend.Last month I wrote about how a basic stock ETF is a simple way to start investing. This month I’m writing about why it’s so important to start saving and investing ASAP.I watch a lot of people get hung up on trying to “time the market”. After all, the golden rule of investing is Buy Low and Sell High. Don’t get me wrong, this is a good rule of thumb. But it can be an obstacle for investors who interpret it as: “Wait to buy stocks until they hit their lowest possible price, and then sell them when they hit their highest possible price.”Investors looking for a home-run will wait and wait for that perfect pitch. Is the market low enough for me to buy? Not quite yet… But while they’re waiting, time is going by. And that time is valuable. How valuable?
Time Value of Money
Time Value of Money (TVM) is the elegant financial concept that puts a dollar amount on your time. It can also help explain why the phrase Buy Low and Sell High might not always be as beneficial as Buy Sooner and Sell Later. Check it out:
We see that, if you start with $10,000, invest it for 5 years, and earn an 8.5% rate of return, you end up with $15,037. Not bad at all.But look how that growth snowballs if you leave the money invested even longer:
Thanks to TVM, there is a huge difference between investing for 25 years vs. 30 years -- $38,715 in this case. The effects are even greater after 30 years. From this perspective, the best time to start investing is simply a long time before you need the money.Trying to time the market means waiting for the market to dip so you can Buy Low. But if you're waiting and the market keeps going up, you’ll have missed out on gains you would have had if you’d chosen to Buy Sooner in the first place.Whether you define Buying Low as waiting for the market to experience a 10% dip, a 20% fall, or a 50% crash, just keep in mind that any of those scenarios could happen tomorrow, or they might not happen for a long time. The stock market has not fallen by 20% since summer 2011. Anyone who’s been waiting for a big decline like that to Buy Low has waited 6 years while the market has marched up, up, up.So, if you’re convinced, and if you’re ready to start your 30-year clock today, here are my three easy steps to start investing:
- Set aside some money and think of it like a “time capsule” - not to be touched for a long time.
- Buy one or two broadly diversified stock funds.
- Hang in there for a generation or so without trying to time anything.
Thirty years from now, you may consider time to be the best friend you ever had.