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Is Stock Market Timing a Smart Investment Strategy?

December 08, 2018 · 6 minute read

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Is Stock Market Timing a Smart Investment Strategy?

If you’ve been hesitant to invest in stocks, or keep your money in the market, you’re not alone. Americans, particularly younger generations, are investing less in the market than they did a decade ago and keeping more of their assets in cash.

It makes sense to feel nervous about how the market will perform and try to minimize risk. All of us remember the 2008 financial crisis and subsequent recession, when the value of the stock market was cut in half .

This experience left a particularly big imprint on millennials, who came of age during the downturn. These days we hear frequent news of stock market dips in response to world events, such as elections and new trade policies.

But waiting for the “right time” to jump into the market is a losing strategy, especially if you’re young. If you’re stashing away a lot of money in cash, you’re missing out on the potential for returns. Read on to learn why timing the market is not the way to go, and some better ways to invest to help build a stronger financial future.

Why Fewer Americans are Investing

Employment figures and the job market have improved since the Great Recession, but many people are still reluctant to take a gamble on the stock market.

Only 54% of Americans on average invested in stocks between 2009 and 2017, compared to 62% in the seven years before the recession. For people between the ages of 18 and 29, that number has fallen to just 31% after the financial crisis.

Part of that is likely because of climbing household debt. Americans held a record $13.1 trillion in debt as of February 2018, which includes credit card debt, student loans, mortgages, and car loans. But that doesn’t explain everything.

A lot of people are also choosing to keep their money in the equivalent of cash, rather than putting it in the market. Americans now keep $2 trillion in checking accounts , or an average of $3,600 each, up from $1,000 a decade ago.

A lot of this reluctance to invest comes from fear. According to a recent survey, 61% of Americans report feeling that investing in stocks is “scary or intimidating,” with millennials feeling especially anxious.

Millennial women in particular report that fear holds them back from investing. That anxiety can leave you in limbo, watching markets rise and fall on a daily basis and waiting for just the right time to invest. In the meantime, your money is sitting idle in a checking or savings account.

Why Timing the Stock Market Doesn’t Work

Observing from the sidelines and waiting for the right time to invest can sound like a pragmatic strategy. In fact, waiting to invest could cost you thousands of dollars over your lifetime. First of all, keep in mind that by leaving your money in a checking or savings account, you’re not necessarily protecting your money from inflation risk.

Right now, the highest interest rate you can earn through a savings account is around 1.9% . Most checking accounts offer much lower rates. The current rate of inflation in the U.S. is 2.2% . So by leaving your funds in cash, you could be losing money.

Furthermore, stock market timing is virtually impossible to predict. An array of factors determine how stocks move, making it difficult to anticipate where the market is heading. Although some famous investors, such as Warren Buffett, have seen extraordinary success with hand picking stocks, many others have crashed and burned.

Even the vast majority of professional fund managers can’t beat the market. Consider that over the past 15 years, more than 92% of large-cap funds (invested in companies with large market capitalizations) and 95% of mid-cap funds (invested in companies with small market capitalizations) did worse than an index fund tracking the S&P 500.

That means that funds where managers actively picked stocks had a 1 in 20 chance of beating the market.

If you try to time the market, human psychology dictates that you’re likely to buy stocks when they’re doing well and sell when you get spooked because the market starts to fall. It’s very difficult to catch a spike or dip before it happens. That means you are likely to buy stocks when they’re high and sell when they’re low, which isn’t a strategy that yields good returns.

If you’re asking yourself, “Is it time to get out of the stock market?” note that some big losses have happened when investors pull out of the market entirely due to panic. Conversely, by not having a foot in the market at all, you will miss out on opportunities to put your money to work. Letting your emotions dictate short-term investment decisions is a recipe for lower returns.

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Why the Time to Invest is Now

Ask any financial advisor: One of the most important predictors of your returns is the length of time you’ve invested in the stock market. While it’s difficult to predict what the market will do in the near future, you can get a better sense over the long term. When you invest and let your money grow, it has the chance to weather short-term ups and downs and grow over time.

On average, the S&P 500, often used as a market benchmark, has grown 7% a year since 1928 , adjusted for inflation.

That doesn’t mean you can predict what will happen this year, or even in the next 10 years, but looking at long term trends can give you a better sense of market dynamics. The sooner you get into the market, the more time your money will have to grow, and potentially withstand any slumps.

You might put off investing because you assume you should pay off all your debts first or achieve other goals, like buying a house. In some cases, it might be true that you don’t’ have the bandwidth to invest because you’re paying off high-interest credit cards or saving for a short-term goal, such as three to six-month emergency fund.

But once you have an emergency fund and are out of credit card debt, you should consider investing, even if you have a mortgage or student loan debt. Even if you’re only investing for retirement, it’s a good idea to start now.

Consider Investing as Early as Possible

The younger you are when you invest, the better. For example , imagine Person A invests $200 a month in a retirement account starting at age 25.

Person B invests the same amount starting at age 35. They both continue to add $200 a month to their account. When they both retire at age 65, Person A will have almost twice as much as Person B: $306,689, compared to $167,550, assuming a 6% rate of return, 2% inflation rate, and 15% tax rate.1

That’s true even though Person A only contributed 33% more to her account. This is because of the power of compound interest, which means that you earn a return not only on the original amount you put in, but on your earnings as well. This principle explains why your money will grow more and more over time.

Invest with a SoFi Invest® Account

Instead of trying to time the market, invest in a portfolio with the potential to generate a reasonable return and that’s strategic about risk. With SoFi Invest, you can invest in thousands of assets in the form of Exchange Traded Funds (ETFs), which charge low fees and offer an easy way to invest in a diverse mix of stocks and bonds.

Your portfolio will be rebalanced every month to keep it on track with your goals and preferred level of risk, without any SoFi management fees. You can also get personalized and complimentary financial planning advice from SoFi’s qualified advisors. You can get the best of both worlds: the intelligent algorithms and low fees of digital investing, combined with the personal attention of a human financial advisor.

If you’re skittish about investing, your anxiety makes sense in light of the dramatic market downturn many of us witnessed a decade ago. But trying to time the market—finding just the right moment to invest or pull out—doesn’t work. Instead, investing in a diversified portfolio can be a great step toward building wealth in the years to come.

You work hard for your money—put your money to work. Open a SoFi Invest account today.

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1The projections or other information generated by the calculator regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Diversification can help reduce some investment risk. It cannot guarantee profit or fully protect against loss is a down market.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.

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