Perfect Timing Less Vital Than Plain Time for Young Investors

Like the ad used to say: Just do it.

For younger investors, simply deciding to invest is likely to be a lot more important in the long run than the individual decisions you make regarding specific investments.

Indeed, academic studies have shown that the bulk of your returns over time depend on the general asset classes you own. The individual investment within that asset class--a specific mutual fund, for example--matters far less in the long run. Ditto for market timing decisions.

Consider data from a recent study by the Schwab Center for Investment Research in San Francisco. It examined the fates of five hypothetical investors, each of whom was given a $2,000 bonus at the end of each year between 1979 and 1998, for investment in the following year.

The first investor has “perfect timing”: He puts his money to work in a Standard & Poor’s 500 stock index fund at the exact lowest point in the market the following year. While he’s waiting, he parks the money in 30-day Treasury bills.

The second investor puts the money into the S&P; immediately.

The third investor dollar-cost averages--in other words, he divides his $2,000 into 12 equal parts, and invests one-twelfth in the S&P; each month.

The fourth investor has the absolute worst timing, investing in the S&P; at the absolute highest point in the market the following year.

The fifth investors plays it safe by leaving the money in 30-day T-bills.

Not surprisingly, the “perfect timer” made the most money after 20 years. Based on the market’s performance from 1980 to 1999, this person walked away with $387,120 in 20 years’ time.

Yet the person who invested immediately at the end of each year still came away with $362,185--only about 6% less than the perfect timer.

The dollar-cost average ended with $352,450, or about 9% less than the perfect timer.

The big surprise, says Mark Riepe, who heads the Schwab center, was that even the person with the worst market timing made $321,569, or just 17% less than the perfect timer.

Similar results were found on a rolling 20-year basis going back to 1926. It just goes to show you that time really is on your side--even if you’re not the best investor.