Who doesn’t want to be able to time the market perfectly and invest at the best time? Take your money out of the market at the best time? The problem is that it doesn’t really work out that way for people usually. If you’re trying to time the market you’re probably falling behind.
If it was easy to time the market then everybody would do it. Everyone would put their money in at the best time, and take it out at the best time. It’s just not possible to always get this timing right. People are just too human. We make mistakes. We act on emotion.
So, really, if you’re asking me “when is the right time to invest in the market” then the answer is always going to be “right now!” Right now, because the sooner you can get started the better. Right now, because you shouldn’t be timing the market. Instead, you should be investing in the market over time.
Investing in the market over time
So how do you do that exactly? Well, you do it by systematically investing more money every month. Or every 2 months. Or every 3 months. Whatever time interval you choose, or whatever method you decide on, just stick to it. Continue to invest. If you continue to invest over time in the end you’re likely to beat out anyone that tried to “time” the market. There’s just not that many people that can actually do that profitably.
Maybe, if you devote all your time to watching the market, and understanding everything that is going on, then maybe you can time it better than others. But why put yourself through all that headache? Instead, focus your efforts on putting your money is good funds, or good companies. Don’t worry about when you put it in, but rather where you put it.
Once you have it in the market you can continue to monitor your investments and make changes accordingly. There may be a time that selling might be the smart thing to do, but usually when you feel like you should be selling it’s actually too late or too early to do so. Instead, you should have a reserve stash of money that you can use if the market has a sale like it did back in 2008, 2009. It’s going to happen again, but this time you’ll be ready to buy more as things plummet.
Don’t be like Joe and Jane Smith. This couple had a $4 million nest egg in retirement. They watched as their account dwindled down to $2 million in early 2009. They finally decided enough was enough and they sold everything and got out. Unfortunately for them, that was a terrible decision because as it happens, that was the bottom of the market and it would have been the best time to buy, not sell.
If they would have left their money alone in there they would have more than recovered their losses over time. Better yet, if they would have had a cash pile sitting somewhere they could have used that money to buy more of the companies they loved when they were selling for steep discounts during the downturn.
How much cash should I have saved away?
This number depends on how well you can manage your money, but a good number to shoot for is 2 years worth of your expenses. If it costs you $50K in expenses each year to live then you should have $100k saved in cash somewhere.
When I say cash I don’t mean it has to be under your mattress somewhere. You can have it in an online savings account where you can earn around 1% on it these days. But the point is that you have access to this money immediately if you need it, and it shouldn’t be in anything risky. Your best option? It’s an online savings account.
If you’re near retirement and you can’t live off your income with all that cash reserve held aside then you might not be ready for retirement just yet. Some people can have all their money invested and feel confident that they can live off their dividends and other income easily without worry. If the market tanks they’ll just stay the course without fear.
If you don’t know how you’ll do in such a situation then you’re better off playing it safe with a reserve fund. Besides, you can use that reserve money to “buy the discount” when everyone else is selling the market.
So, when is the best time to invest in the market? Right now! When the market is going up. Then again, when the market is flat. And again, when the market is going down. Then, when the market tanks, and tanks some more, and then tanks some more, you should be ready to buy more, more, and more. Think about where to put the money, and not when, and you’re going to do great.