Time, Not Timing, Controls Return When It Come To Investing, Time Is Always On Your Side
Whenever stocks have been going up for a while, as they’ve been doing for years, it’s natural to worry that investing now will mean getting in at the peak and riding the market down.
A glance at any chart of the Dow or S&P 500 shows that, despite the bumps and jolts, the market has moved up for decades, so the average investor has no real need to try to time the market’s cycles. Various studies have shown that investors generally lose by trying to call the peaks and troughs, partly because they keep their money on sidelines.
A new study by the Neuberger & Berman mutual-fund family dramatically demonstrates the high cost of dithering. The study looks at two hypothetical people who invested in a basket of stocks reflecting the Standard & Poor’s 500, as you could do with an S&P 500 index fund.
Early Bird started, well, early, investing $2,000 a year from 1967 through 1976, a $20,000 total. Unfortunately, she always invested on the worst day of the year, when the S&P 500 was at its annual high.
Late Bird invested $2,000 a year from 1976 through 1995, a $40,000 total. But he was a market-timing whiz, always buying on the day the market hit its low for the year.
Each investor held his portfolio until Feb. 28, 1996.
Who did best? As you’d expect, Late Bird had the better yearly percentage gain, an average annual return of 16.3 percent versus Early Bird’s 11.9 percent.
But in the more important contest - who ends up with most - Early Bird was a hands-down winner. Her portfolio grew to $320,285, while Late Bird’s rose to only $270,219.
Early Bird ended up with more, even though she invested only half as much as Late Bird and earned a lower annual return. The key difference: Her portfolio had 10 more years to grow.
Certainly, all investors want the best return they can get, but the Neuberger & Berman study, like many before it, shows that the big payoff comes from time, not timing.
Why do some people think the stock market is, as they put it, “overpriced?”
Partly, because it’s natural to think that what goes up must come down.
But there are more quantitative factors as well. For example, dividend yields - the dividend payment divided by the stock price - average an unusually low 2.2 percent for the companies in the S&P 500. For yields to get back to a more traditional level of 3 percent or 4 percent, companies have to pay higher dividends, or stock prices have to fall. So investors who focus on dividend yields are nervous.
But Jeffrey M. Applegate, market strategist for Lehman Bros., says things aren’t that bad, since the S&P 500 isn’t what it used to be.
Standard & Poor’s Corp. routinely changes the 500 companies in its index to reflect mergers, bankruptcies and other events. As of April 15, there were 78 companies in the index that weren’t there in October 1990, when the current bull-market cycle began.
The new companies, Applegate says, have skewed the statistics. They have average dividend yields of 1.2 percent, versus 2.4 percent for the 422 companies that remain on the list from 1990.
The new companies’ profit margins average 8.6 percent, compared with 6.5 percent for the others.
The numbers are different because the new companies include high fliers such as Microsoft, Cisco Systems and Sun Microsystems. They’ve replaced some pretty stodgy companies, such as Borden and Lone Star Industries.
This doesn’t mean that dividend yield, P/E ratios and other traditional yardsticks aren’t worth worrying about. But Applegate argues that changes to the S&P 500 mean that these higher-than-usual figures are not a signal to rush for the exits.