Below is a copy of a post I made on medium. I thought this group might like it (not linking there because that would probably be self-promotion?)
"The stock market is a device for transferring money from the impatient to the patient." - Warren Buffet
If you’re investing in Index Funds, does it matter when you buy them, or just how long you hold them?
Let’s run an experiment using the S&P 500 Index. We’ll compare two hypothetical investors, Lucky Larry, and Unfortunate Ulysses. Both investors plan to invest $5000 each year into an Index Fund that tracks the S&P. Both also plan to invest only one time per year, the entire $5000 in a single purchase, and not spread their purchases out throughout the year.
Lucky Larry has great timing and purchases every year at the lowest month close.
Unfortunate Ulysses has… unfortunate timing, and purchases every year at the highest month close.
Both invest every year for 40 years starting in 1965. How much better off will Larry be when they retire in 2005?
Note: All numbers are inflation adjusted for October 2017.
Interactive spreadsheet of the above (make a copy to play with the numbers yourself): http://ift.tt/2h1Kvu2
The results? Lucky Larry: $578,524. Unfortunate Ulysses: $483,791. A difference of $94,733, or roughly 16.37%.
A 16% difference should not be brushed aside, but it’s not as bad as I had originally predicted the difference would be. If you consider that both hypothetical investors lost around 43% of their account balance between 1999 and 2002, a 16% difference after 40 years doesn’t seem so bad at all.
And if they would have just spread their purchases out throughout the year, their ending balance would have been $525,652, which is only $52,872 off of the "best case" scenario, or roughly a 9% difference.
When investing in Index Funds, time is more important than timing.
Submitted November 01, 2017 at 10:50AM by aaron_hoffman http://ift.tt/2z4Dako
