There’s a very popular philosophy that “Time in Market” is one of the most critical factors in investing. Combined with a buy and hold and broad market diversification, it can take $10,000 and make it $40,000 in 12-15 years. Sorry for the long words, but broad market diversification simply means buying a mutual fund or ETF that covers many different companies around the world. One good example is Vanguard Total World Stock ETF (Ticker: VT).
“Time in Market” is important because you want to start the clock and get the investment working for you. Your money can’t grow if it’s sitting under a mattress or making 0.01% interest in a bank account.
If you were to search the internet for articles about “Time in Market,” the front page of every search engine will likely point to the benefits of being in the market as long as possible.
This is great, but since you’ve read the title, you know I’m going to blast a hole in the “Time in Market” philosophy. If you are a beginning investor, this is your cue to review the first paragraph above and continue with your day.
Have all the beginner investors gone? Good.
Here’s my personal case against “Time in Market.” In August we sold a condo. We hit the top of the market, which was perfect. That previous article also details our investment plan. The idea was to invest in real estate investment trusts (REITs) and high-dividend ETFs. It could be argued that REITs aren’t great for taxes, but my goal was to show my wife that we’re getting monthly checks. If we still had a rental property, we’d be getting checks too. The checks might be smaller from Vanguard’s brokerage account, but we don’t have to do any work for them.
I had one minor problem. I can’t remember ever moving more than $10,000 without lawyers and bank wires. I didn’t want to transfer $200,000 at once. I decided that it would be safer to do it in pieces. I started off with $5,000 and then $10,000, up to $20,000. It would take time for all the money to get in this way, but it isn’t bad. It was easy enough to move over the month.
A funny thing happened along the way. I don’t know if you’ve noticed, but the stock market has been going down. In September, the S&P 500 fell 9.3%, and the Nasdaq lost 10.5%. (So much for the sell in May, come back in September plan).
I put together a table to show the prices of the ETFs when I made my first investment in them. This is what I would have paid if I invested all at once with the theory that “Time in Market” is most important:
Ticker | Type | Time in Market | Current Price | DCA Cost Basis | At Once % | DCA % |
---|---|---|---|---|---|---|
VNQ | Real Estate | $98.73 | $80.17 | $91.10 | -18.8% | -12.0% |
VTI | US Stock | $207.18 | $179.47 | $197.92 | -13.4% | -9.3% |
BND | Bonds | $75.95 | $71.33 | $74.55 | -6.1% | -4.3% |
HDV | High Dividend | $104.00 | $91.29 | $100.88 | -12.2% | -9.5% |
VYM | High Dividend | $106.22 | $94.88 | $104.86 | -10.7% | -9.5% |
QQQ | US Stock | $295.29 | $267.26 | $288.91 | -9.5% | -7.5% |
VXUS | International | $52.84 | $45.77 | $49.42 | -13.4% | -7.4% |
Ouch! As you can see, I would have bought VNQ at $98.73, which would only be $80.17 this morning. That’s a loss of almost 19%. Instead, I kept buying using Dollar Cost Averaging as it went on sale. It’s not great that it is still down 12% from what I paid for it, but I certainly saved myself 4-5% of losses.
I suppose you could say I got “lucky” because it was an unusual month. It’s not often the market drops 9% in one month. If the market went up 10% in the month, I would have been better off investing once to get those gains. I’d like to say that I had a crystal ball and knew the month would be down, but if I did, wouldn’t I have just waited until the bottom?
I don’t know when the bottom is coming, but I hope to pick up more shares along the way. I like to track how far the ETFs are from their highs. For my asset allocation, I’m paying about 26% less than when stocks were at their peak. I don’t know when they’ll get back to those highs, but when they do, I’ll be happy that I bought in at these levels.
What do you think? Is DCA the way to go, or is time in market truly the most important way to invest?