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Summary Prognosticators such as Jim Cramer and some SA contributors do a disservice to their watchers and readers by hyping the news of the day. To project the future you sometimes have to look backwards. The effect of compounding is the real magic in the market. Look at tax strategies, too. I’m sure you all have read headlines like in the Fox Business article “How To Time A Market Correction” or the SA article “Bearish Sentiment Indicates Likelihood Of A Fall Rally, But Anticipate A Bear Market After The Bounce”. A few years ago, in a book he wrote, Jim Cramer, of CNBC’s Mad Money , suggested selling stocks (or not buying) while the U.S. Congress grappled with raising the debt ceiling, and then getting back in once an agreement was reached. Arguments like those have been around forever and the claims that the prognosticators have the magic formula, the secret sauce, by trading in and out of stocks, taking advantage of opportunities, news of the day, or the latest short-term trends, are usually proven false. I subscribe to a different philosophy and adamantly recommend to all my readers and followers: Time in the market is more important than timing the market. Time is golden But don’t blindly take my word for it. Look at the data. In its 2015 guide to retirement planning J.P. Morgan Asset Management provided the results of a study which are astounding, at least to me. Anyone fully invested in the market, say in the S&P500 index [funds available today include Vanguard’s S&P500 ETF (NYSEARCA: VOO ) or Fidelity’s Spartan® 500 Index Fund – Investor Class (MUTF: FUSEX )] from 1995 through 2014, including two of the worst economic, financial, and investing periods in history, would have logged a 655% return, or an average of 9.85% per year. (There is no guarantee that the market will perform that well going forward. I wrote about potentially lower returns here .) However, those missing out on the ten best trading days would have realized a return more than one third lower, 6.1% per year on average. Missing out on more of the best days? The results are even worse. A portfolio worth $100,000 on Jan. 3, 1995 would have grown to $654,530 (minus expenses and fees *) before taxes. (*) The VOO ETF has annual expenses of 0.05% and Fidelity charges 0.1% per year for the FUSEX fund Of course you could have followed the advice such as that proposed in the articles mentioned above or believed Jim Cramer, traded in and out of the market, and accumulated less than a third of that if you missed the twenty best performance days over the next 20 years. Even more disconcerting, you might have lost about half of your original investment if you were out of the market during sixty of the best trading days, less than 1% of the total calendar time during those two decades, really just a blink of an eye in the big scheme of things. (click to enlarge) Source: Business Insider Gains on the gains The real magic is “time in the market” and the effects of compounding, or the “gains upon the gains”, during full investment. The well-known formula shown below should be your guiding principle, not the random news of the day*. %Gain = 100 x (1+i)^n where i is the “interest rate” (or growth) of your investment over a certain period and n is the cumulative time invested. (*) Such as a ” news ” article on the SA site that indicated that Apple, Inc. ( AAPL ) iPhone shipments were sure to have slower growth because one supplier reported lower guidance. The chart below shows the true magic of compounding over a 30-year period with three different “interest rates”. One can see that the effects are more pronounced in later years. (click to enlarge) Conclusion A winning strategy to accumulate a significant nest egg is one that is based upon time in the market, not trying to time the market. Get started early and stay in. Take advantage of the magic of compounding and maybe a tax-deferred account. The time to start saving and investing is now. Scalper1 News
Scalper1 News