Waiting for a Stock Market Crash Before You Invest? Here's What the Data Says It Can Cost You.
Yahoo Finance ·
When the stock market is volatile, some caution in investing might be warranted. The market is led by a handful of AI stocks spending huge sums amid rising interest rates and stock valuations, so it might seem that a crash is imminent. At least a healthy correction, a pullback of 10% or more in a major index like the S&P 500 , could be warranted. That could leave many investors on the sidelines, accumulating cash while waiting for a market downturn. But that could be a huge mistake. Most of the time, you'll end up with a smaller portfolio in the long run. Here's what the historical data have to say. Imagine two investors who plan to save $5,000 per year. Investor A consistently puts $425 per month into an S&P 500 index fund like the Vanguard S&P 500 ETF ( VOO -4.07% ) . Investor B also saves $425 per month but will invest only if the S&P 500 is 10% below its all-time high. Since the start of 1976, when John Bogle launched the first S&P 500 index fund, here's how the two investors performed. The following table shows the average total portfolio value over various rolling periods since 1976. Data source: Robert Shiller with calculations by the author. Note that the table above doesn't factor in dividends and assumes cash earns no interest. The two factors balance each other out somewhat. The big difference between Investor A and Investor B indicates that cash would have to generate a significantly higher yield than stocks to overcome the drag of waiting to invest. What's clear from the table above is that Peter Lynch was right when he said, "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves." Over any meaningful amount of time, the consistent investor dramatically outperforms the market timer on average. What's more, timing the market never performs better in periods of 20 years or longer.
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