[Insight & Opinion] The Optimal Investment Timing: Buying Good Stocks Early and Often

[Asia Economy] Global inflation, the Ukraine war, and forecasts of worsening corporate earnings in the second half of the year have caused stock markets worldwide to halt their post-COVID-19 rally and experience historic declines. Individual investors, who had poured in large amounts since 2020, are now stopping their bargain hunting and shifting to a wait-and-see or selling stance.

In the short term, the market may experience volatility and decline, but the belief that diversified investment in high-quality stock indices with long-term growth potential can yield profits is weakening. Investors are increasingly concerned about how much further the market might fall, whether they should sell now, or if it is time to start buying at lower prices, seeking the optimal timing for stock purchases.

So, when is the optimal timing to buy stocks? We would like to share the results of a past simulation conducted by an investment-focused blog. The example features three investors: Sandy, Julia, and Amy. They each managed $200 monthly investments from 1982 to 2022, about 40 years, investing in the S&P 500 index fund at different times. The invested index funds were held without selling. Sandy and Julia struggled to find the best buying timing in a highly volatile stock market. During this period, the S&P 500 index experienced five major declines: Black Monday, the Kuwait War, the dot-com bubble burst, the global financial crisis, and the COVID crisis. If it was not the timing they considered ideal, the $200 monthly investment was saved in a bank account with a 3% annual interest rate. When they thought it was the right time to buy, they invested all the accumulated funds into the S&P 500 index fund.

As a result, Sandy invested all her accumulated money into the S&P 500 at the five peak points when investor sentiment was extremely high, representing the worst timing. Julia invested all her accumulated money at the lowest points during the five crashes, representing the best timing. In contrast, Amy did not try to predict the market and invested $200 monthly into the S&P 500 index fund through dollar-cost averaging. Among the investor who chose the worst timing, the one who chose the best timing, and the one who gave up market prediction and invested mechanically, who achieved the highest returns?

The $96,000 invested grew after 40 years to $764,200 (Sandy), $1,128,332 (Julia), and $1,366,329 (Amy). Amy, who invested mechanically without predicting the market, achieved higher returns than Julia, who invested at the best timing. Despite investing at the worst timing, Sandy also achieved a high return of 796%. Although Sandy failed in timing, she was able to earn profits by choosing good assets and holding them long-term.

In the current market, which is falling day by day, is there any investor who can know when the bottom will be? If someone talks about market bottoms and buying timing, they are surely deceiving investors or deceiving themselves. Many investors maintain a long-term perspective when the market is rising but start worrying about timing and outlook when the market declines. However, during such market downturns, what long-term investors should consider is not the timing of investment but whether the assets they are investing in are truly high-quality assets worth holding long-term. And it should be remembered that the best timing to invest is to invest in good assets as early and as often as possible.