The importance of consistent – rather than perfectly-timed – investing

Marissa Mah, B.Comm., LL.B., LL.M. - Sep 14, 2023
Most investors don’t have access to time machines, so being able to make perfectly timed investments is a very difficult thing to do. Let’s take a look at how we can best coordinate our investment strategy to think about ‘timing’ in a different way.

Imagine if you were able to use a time machine to go back in time and tell your former self the exact moments when the value of a given publicly traded company was going to go up and down. If you had that specific information, your younger self could perfectly time when they would buy and sell stocks in that company, to ensure that they were always maximizing their profits and never losing money. There’s no doubt that they could make millions using that strategy!

Of course, most investors don’t have access to time machines, so being able to make perfectly timed investments is a very difficult thing to do.

Thankfully, experienced investors know that you don’t need a handy sci-fi plot device to reliably optimize your profits when investing. Let’s take a look at how we can best coordinate our investment strategy to think about ‘timing’ in a different way.

Why time in the market is better than timing the market

In a previous post, we explored how investing over long periods of time is one of the best ways to generate wealth, thanks to the power of compound growth. In short: the longer you invest your money and re-invest the profits you make, the more it will grow exponentially and generate increasingly large returns.

However, many investors might very reasonably wonder if it is better to wait to put their money into investments at specific times – such as, for example, after the price of stocks falls. One can see how doing so would have clear advantages when it comes to maximizing profits: when the market is down, stocks can be thought of as ‘on discount’, so timing one’s purchase when prices are low would allow you to get more for your money. This is preferable because the more stocks you have, the more your money will likely grow over time.

For example, let’s say you had money to invest on the exact day when the stock market experienced a 10% crash. If you bought in at the bottom of the crash, you would be getting 10% more stocks for your money than if you had bought in one day earlier. If you plan on holding that investment for the long-term, getting 10% more stock now is a significant win, because your money will grow much more than if you had purchased fewer stocks.

However, what if we reverse the above example? Instead, imagine the stock market crashed 10% one day after you invested your money. That means the stocks you purchased are now worth 10% less than they were one day ago – an obvious loss. Therefore, timing your purchases to occur after the crash is of course the more preferable option.

Unfortunately, as we mentioned earlier, no one knows exactly when market fluctuations are going to occur, so ‘timing’ our purchases during market lows, and avoiding purchases before them, is nearly impossible to achieve on a consistent basis – let alone even once!

So, if timing the market is an unreliable strategy for optimal investment, what is a better approach?

Investing your money consistently over time: dollar cost averaging

Experienced investors understand that growing their wealth is best achieved by spreading out their money over the entire course of the market’s fluctuations. This strategy – often referred to as dollar cost averaging – takes advantage of the fact that the market experiences intermittent ups and downs as time progresses, while generally moving in an overall upwards direction. With this approach, an investor makes smaller consistent investments at pre-determined intervals, regardless of how the market is moving. In other words, whether the market is up or down, these investors continue investing the same amount of money on a regular basis as time progresses. By doing so, they are able to take advantage of the times when the market is down, even though they will probably also invest when the market is up. Overall, however, their investments ‘average out’ so that they don’t lose tremendous amounts of money from poorly timed investments, but still benefit from those times when the market is in their favor.

To illustrate the value of this approach, imagine you have $10,000 that you want to invest in a particular company. Today, the price of that company’s stock is $100 a share. Therefore, if you invest all $10,000 now, you will be able to afford to buy 100 shares.

However, if you instead spread out that investment so that you bought $1000 of the company’s shares each month, the final outcome might be different, depending on the fluctuations in the stock’s price:

  • Month 1: $100/share – 10 shares purchased
  • Month 2: $110/share – 9 shares purchased
  • Month 3: $120/share – 8 shares purchased
  • Month 4: $100/share – 10 shares purchased
  • Month 5: $90/share – 11 shares purchased
  • Month 6: $90/share – 11 shares purchased
  • Month 7: $80/share – 12 shares purchased
  • Month 8: $90/share – 11 shares purchased
  • Month 9: $100/share – 10 shares purchased
  • Month 10: $100/share – 10 shares purchased
  • Total shares purchased: 102

While 2 extra shares might not seem like much in this example, you have still made more money ($200) overall by spreading out your investment. Furthermore, by having 2 additional shares, you will be able to grow your money exponentially more in the long-term.

Of course, if the price of the stock had continued rising over the 10-month purchasing period instead of fluctuating, you would technically be worse off (i.e. you would have purchased fewer shares overall). However, in the long-term, it is likely that the price of the stock will fluctuate so that you will still be able to take advantage of lower prices along the way, even if the overall movement of prices is slowly upwards.

It is also important to note that most investors do not usually put all their money into a single company. Thus, if you extend the strategy of dollar cost averaging to investing into the whole stock market with an index fund, for example, you can again see how this approach is advantageous. Indeed, the entire stock market fluctuates on a day-to-day basis, even though it has historically increased in value over the long term. Therefore, by investing regularly into the market over a long-term period, you will – on average – sometimes be purchasing shares when the market is ‘on discount’, while also purchasing at times when the market is up. Again, by doing so, you will maximize your chances that you can make the most of your money, without having to gamble on timing the market with a single large purchase.

This is additionally important because most investors don’t simply invest a lump sum and then never invest again. Usually, people acquire money over time, and are able to invest periodically as they get cash in their hands. Thus, by consistently investing that new money at regular intervals – rather than holding it with the intention of making a lump-sum investment all at once – a person can maximize the chances that they will get the most out of their money.

Taking action when the time is right

“If a Mercedes Benz goes down in price by 20%, would you not be tempted to buy the car?”

– Edward Mah

A very important point about dollar cost averaging is that this strategy does not need to prevent you from taking advantage of opportunities when ‘timing’ an investment might make sense. However, there is a big difference between ‘seizing an opportunity that presents itself’ and ‘timing the market’ as your primary approach to investing.

Indeed, taking advantage of market downturns when you have extra cash to invest is not the same thing as trying to time the market with most of your investments. If the market has taken a turn for the worse and you have cash on hand, that might be a good opportunity to get the investments you want ‘on sale’. However, experienced investors know that this is considered a ‘bonus’ opportunity that might occur in addition to always having a pre-defined plan for making consistent investments over the long term, regardless of market fluctuations.

The distinction between these concepts might seem subtle, but they can mean the difference between growing your wealth reliably and making huge financial mistakes that can impede your progress towards financial security.

Navigating these distinctions is often best done with guidance from someone who has years of experience identifying opportunities when they happen, but who is also able to ensure that your overall investment strategy is based on a consistent long-term plan. Our team of investment advisors have decades of experience doing just that, and we’d love to talk to you about how to make the most out of your financial plan – no time machines required.