Would putting the above investing maxim into practice really help to increase your portfolio? There are numerous studies and observations that support a “yes” answer. It is nearly impossible to consistently time the ebb and flow of the market to temper the volatility of your portfolio, while still maximizing returns. Therefore, the easiest solution may be to spend “time in the market,” and not try “timing the market.”
Simply put, this means to stay invested for the long run. The average annual return from 12/31/1983 – 12/31/2013 was 8.40%. If you missed the five best performing days in the stock market during this period by selling out of all of your stocks, your average annual performance would have been 6.85% (Source: Columbia Management). Given this logic, the best solution also requires the least effort. Less effort, better results – sounds good to me!
Automate Your Investing Schedule
An effective method to incrementally grow your portfolio and maximize your time invested is to automatically invest new dollars on a set monthly schedule. Many investors already do this within their 401(k) accounts, but I would encourage you to do this with all your investment accounts. Allocate a portion of your monthly disposable income to a cash emergency fund and automatically transfer the remainder directly into your portfolio. It is a simple savings solution that yields powerful results. This strategy constantly deploys dollars into your portfolio, thus lengthening your investment timeline.
How to Capitalize on Automated Investing
Your automatic contributions should first fund your tax qualified (retirement) accounts. Once you reach the annual contribution limit for an IRA ($5,500 in 2014 and 2015), you should begin saving into a liquid, taxable account. Many investors will link their checking account to the IRA and will have a fixed amount automatically transferred out. To effectively fund your portfolio incrementally, you should monitor your monthly cash flow situation to determine your ability to invest, as well as determine a feasible contribution amount. The last thing you want to do is to sell an investment to pay a bill.
Time Is an Investor’s Best Friend
If “time in the market” produces positive returns, then the more time you have the better. It does not matter if you are 25 or 45 years old, simply following the principle of consistent contributions and staying invested should generate returns that will help you achieve your financial goals. History has shown that the stock market can be a significant factor in creating wealth. However, history has also shown that it can cause investors to panic. Given this, be pragmatic with how you approach investing in the market, avoid your emotion of panic, and continue to invest on a set schedule.
It is foolish to assume the market always goes up. Knowing that markets are volatile, do not speculate in the stock market with a time horizon of less than five years. Rather, understand the fundamentals of your investment and the growth prospects over a longer period of time.
The Last Step
Do not overthink it. Earn, invest and most importantly, do not try to time the market.