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Timing the market: The absolute worst vs absolute best vs slow and steady
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I downloaded the historic S&P 500 data going back 40 years. I dumped everything in Google Sheets and modeled the three different portfolios, named after three fictional friends Tiffany, Brittany and Sarah. All three saved $200 of their income per month for 40 years for a total of $96,000 each. But after 40 years they all ended up with different amounts based on their investment strategies.
Tiffany's Terrible Timing
Tiffany is the world's worst market timing. She saves $200/month in a savings account getting 3% interest until the worst possible times. She started by saving for 8 years only to put her money in at the absolute market peak in 1987, right before Black Monday and the resulting 33% crash. But she never sold, and instead started saving her cash again, only to do the same at the next three market peaks. Each time she invested the full amount of her saved cash only to watch the market crash immediately after. Most recently she put all her money in the day before the 2007 financial crisis. She’s been saving cash ever since waiting for the next market peak.
With this perfectly bad market timing, Tiffany still didn’t do too bad. Her $96,000 she saved and invested over the last 40 years is now worth $663,594. Even though she invested only at each market peak, her big nest egg is thanks to the power of buying and holding. Since she never sold, her investment always recovered and flourished as the market inevitably recovered far surpassing her original entry points.
Brittany Buys at the Bottom
Brittany, in stark contrast to Tiffany, was omniscient. She also saved her money in a savings account earning 3% interest, but she correctly predicted the exact bottom of each of the four crashes and invested all of her saved cash on those days. Once invested, she also held her index fund while saving up for the next market crash. It can’t be overstated, how hard it is to predict the bottom of a market. In 1990 with war breaking out in the Middle East, Brittany decided to dump all her cash in when the market was only down 19%. But in 2007, the market dropped 19% and she didn’t jump in until it fell all the way down to a 56% drop, again perfectly predicting the exact moment it had no further to fall and dumped in all of her cash just in time for the recovery.
For this impossibly perfect market timing, Brittany Bottom was rewarded. Her $96,000 of savings has grown to $956,838 today. It’s certainly an improvement, but interesting to note that when comparing the absolute worst market timing versus the absolute best, the difference is only a 44% gain. Both Brittany and Tiffany have the vast majority of their growth thanks to buying and holding a low cost index fund.
Slow and Steady Sarah
Sarah was different from her friends. She didn’t try to time market peaks or valleys. She didn’t watch stock prices or listen to doomsday predictions. In fact, she only did one thing. On the day she opened her account in 1979, she set up a $200 per month auto investment in an S&P 500 index fund. Then she never looked at her account again.
Each month her account would automatically invest $200 more in her index fund at whatever the current price happened to be. She invested at every market peak and every market bottom. She invested the first month and the last month and every month in between. But her money never sat in a savings account earning 3% interest.
When Sarah Steady was ready to retire, she signed up for online access to her account (since the internet had been invented since she last looked at it). She was pleasantly surprised with what she found. Her slow and steady approach had grown her nest egg to $1,386,429. Even though she didn’t have Brittany’s impossibly perfect ability to know the bottom of the market, Sarah’s investment crushed Brittany’s by more than $400,000.
Recap
- Amount Saved/Invested: $96,000 each
- Investment: Buy and hold an S&P 500 index fund
- Tiffany (worst timing in the world): $663,594
- Brittany (best timing in the world): $956,838
- Sarah (auto invests monthly): $1,386,429
So if you’re worried the market is too high and we’re due for a crash. Or you want to wait for the inevitable drop before you put your money in. Think about whether you’re so good at predicting the market you can do it better than Brittany who knew when to invest down to the exact day. And even if you are that good, realize that it’s still a losing strategy to the early and often approach that Sarah executed so flawlessly.
Here's the spreadsheet for anyone who wants to see the numbers in action! :)
Edit: Some of you might remember me from my how I retired at 36 post.
Top Comment:
For reference, the savings account only approach is worth about 184k.
Visualising Every Single Day of the US Stock Market for the Last Decade [OC].
Main Post: Visualising Every Single Day of the US Stock Market for the Last Decade [OC].
Top Comment: Thought this would be cool to give some context to the market moves yesterday. Basically everything went into a bit of a meltdown after the Chinese Yuan depreciation, escalating the trade war. Data Source: S&P 500 Index via Yahoo Finance Viz Tool: Rawgraphs and Microsoft Excel
2 More Nasdaq Market Days to CES 2025
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SoundHound will showcase its latest tech.
Short sellers don't want to see January 7, January 8, January 9, and January 10.
CES 2025 will be crowded with high profile people.
They will ask questions to SoundHound employees.
They will ask questions to cars.
Maybe they will ask questions to another SoundHound EDGE Device.
And they will get answers.
Share price can rise again starting that day.
HODL and I hope we can see more sunny days.
This is not an investment advice. You can lose money with each investment decision. Act wisely, make your own choices.
Top Comment:
According to this sub, then, we’ve got about a week before the stock goes up $10 a share and stays there for a while
Humble Bundle best of Blender Market is back for 2 days!
Main Post: Humble Bundle best of Blender Market is back for 2 days!
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I love and hate these,
Hey!! you have these awesome addons for dirt cheap but when u want to update to a newer version of blender. Tough luck buy it again at full price.
They've been awfully quiet about the stock market in the last 10 days 😂
Main Post: They've been awfully quiet about the stock market in the last 10 days 😂
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I HATE when people make a big deal about a one day stock market event. Seriously, has no one paid vague attention to the market everyday since they were like 15?
Stock market will crash in 60 days
Main Post: Stock market will crash in 60 days
Top Comment: Looking at my portfolio, the stock market crashed a year ago
What does at Market (Day) mean for online trading?
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Just put in another $300 for my Roth IRA and the order says " Buy $300.00 of FXAIX at Market (Day)"
What does this mean? Does this mean that it purchased it this morning when the stock markets open? Or when it closes for the day?
Kind of new to investing of any kind. Thanks in advance!
Top Comment: Mutual funds trade at the close of market each day
Day trading through prolonged downtrend/bear market
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For those of you that have been day trading for a long time now, what are your thoughts on day trading in downtrends or bear markets? I feel as if we could be heading into a recession sooner rather than later, and I’m worried because I’m just starting out day trading full time. As of now I’ve been trading crypto, but I’m considering jumping into the regular stock market
Top Comment: You can trade any market... just be on the right side of the trade... Don’t get caught in chop. Wait for a trend.