For someone who spends most of his time talking about investing, I have a shocking number of friends that are too scared to do it.
“I’m scared of losing my money,” they say. Or maybe “I just don’t know which stocks to pick. I want to do my research before I get into it.”
Unfortunately for my friends, they are then subjected to one of my favourite lectures: why you don’t need to be scared of risk in investing, and why waiting until the perfect moment can be a bad idea.
This is one of the most basic philosophies of long-term investing. Over time, stocks usually rise. I’m oversimplifying things to an almost obscene degree, and there are of course no guarantees it will keep being true, but broadly, this basic idea has been right for over a century. Let me explain with an example.
Imagine you had invested all your life savings — let’s say €10,000, back in July 2007, into an S&P 500 ETF (which basically mirrors the whole U.S. stock market), just before the huge stock market crash and years-long recession. Your timing couldn’t have been worse than that and 14 years later, you’d probably still be below where you started, right?
Wrong. In fact, by July 2021, that money would have grown to €28,469, almost tripling from when you first invested it. The recession would have still been hard — at its lowest point, your €10,000 shrank to just €4,900, but the recovery quickly made up for it. Take a look at this chart:
See that dip in 2020? That’s how markets reacted when the coronavirus pandemic began. Even global shutdowns were nothing but a blip for stocks.
Again, there are no guarantees when it comes to investing. But so far, long-term investing has shown to be a strategy that can weather recessions and pandemics. The trick is being able to hold your investment for a long time.
That can of course be a problem if you’re not able to hold your money for long. For example, if you had needed to withdraw your savings between July 2007 and March 2013, you would have sold your investment for less than you put in. It’s not until March 8, 2013 that you would have started making a profit.
I know what you’re thinking. You’re looking at that chart above and realizing how much more money you could have made if you had invested at the bottom, around 2009. Timing your investment for the perfect moment is the best way to make money, right?
Yes and no. Yes, timing your investment right would absolutely have made you more money. But there’s one big factor missing: how would you have known it was the perfect time?
2009 was a dark year for stocks. Lehmann Brothers, one of the biggest investment banks in the world, had collapsed just a few months earlier, and the recession was at its worst. No one knew how much worse things could get. To invest your life savings at that time would have been an incredibly risky and brave act. With the benefit of hindsight we now know it wasn’t risky at all, but we don’t have hindsight when we make investment decisions.
What about markets today? How could we time them better? It might look like markets are hitting a peak and are destined to fall again. And they might. Or they might keep rising. But every day you wait, you delay letting your money benefit from the growth of today. If you didn’t invest those €10,000 in 2007 and are still waiting for the perfect moment today, you already lost €18,000 in potential gains.
As always, your future gains are never guaranteed. But the sooner you start, and the longer you hold, the better your chances are of growing your money.