Investing is All Down to Timing

An interesting chart was published recently on the NY Times website. It shows the importance of exactly when you invest in the stock market and the benefits (or lack thereof) of long term investing.

The trick to reading the chart is the select the year that the investment was made on the left-hand axis, and then select the year in which the investment was withdrawn on the horizontal axis.

The example included in the chart shows how investing in 1930 and withdrawing the investment 20 years later in 1950 would have returned about 2% per annum after inflation and taxes (not a very good outcome). The chart specifically looks at 20-year returns (represented by the angled line starting from 1940).

It’s a general rule of thumb that investing in the market is a long-term proposition – that this allows you to ride out the cycles over the long run and deliver an acceptable return.

The evidence, however, shows that there have been long periods over the past 90 years where even a 20-year timeframe did not produce returns in excess of inflation.

The data is for the S&P 500, so other markets may be slightly different, although it’s likely that the overall conclusion will be the same. If you invest at the wrong time (and the wrong time could last as long as 15 years) then even a 20-year timeframe will not produce returns in excess of inflation.

There also appears to be a discernible pattern to the data in the chart, and it doesn’t bode well for returns over the next 10 years or so.