Caitlin slipped on her shoes and coat before walking down the path to her Camry, which she had parked in front of her house. She opened the door, dropped into the driver’s seat and sat for a moment. Caitlin planned to meet a handful of friends that evening. It was a book club group that met once a month. But instead of talking about their most recent book, Caitlin had other ideas.
Caitlin worked as an optometrist. Two weeks previous, she sold her business, paid off her debts, and now had about $1 million in her savings account. She knew she should invest it. But when was the perfect time? The stock market had been jumping around like a five-year old on a sugar binge. Several reports on television said stocks were going to slide. But one economist said it was a good time to buy.
“I know who to ask at the book club,” she said, speaking out loud as she pulled her car onto the street.
She drove onto Tracey’s driveway and noticed that most of her friends were already there. They wouldn’t hear her knock, so she opened the door herself and walked into the living room.
Tina was the woman Caitlin wanted to speak to most. The 65-year old had been investing in the stock market since she was 25 years old. In 1980, she started to invest $1,500 a year in her IRA. That was the maximum allowable at the time. The allowable contribution increased over time, so Tina had continued to contribute the maximum every year.
“Tina, could I ask you a personal question?” Caitlin said, as she sat beside her on the couch.
“Of course you can,” she replied, leaning across to put her book on the coffee table.
“I’ve sold my business, and I have about a million dollars. I want to invest it. But I’m worried this might not be the perfect time.”
Tina raised her eyebrows and asked, “What are you afraid of?”
“I’m worried,” said Caitlin, “that if the markets drop as soon as I invest it, I’ll take a big loss right away. This is a lot of money.”
Tina smiled. “Caitlin,” she said, “How much money do you think I have in my IRA?”
“I’m guessing you have quite a bit.”
“Well, I invested 70 percent in a U.S. stock index and 30 percent in bond market index. Today, it’s worth about $1 million.”
“Wow,” said Caitlin, “I didn’t know you had THAT much!”
“Yeah, it snowballed over time,” said Tina. “I kept adding money every month. Sometimes, it had good years. Other times it dropped. But I practiced what I call, ‘The Zen of investing.’ That means I ignore market news. Most of the time, I ignored my portfolio’s balance too.”
“OK, so I trust your experience, you’re the perfect person to ask,” said Caitlin. “Should I wait a few months before investing my million dollars?”
Tina didn’t answer. She leaned back in the couch, tilted her head and asked Caitlin a question instead.
“Caitlin, you know I’ve seen several different markets, right?”
“Sure,” Caitlin said, “I guess you have.”
“You also know that I added money every month, and I’ve stayed invested for 40 years, right?”
“Sure,” Caitlin said.
“So…do you think I should sell my investments today and then re-enter the markets when…God knows when?”
Caitlin scrunched up her face and said, “No, that doesn’t make sense.”
“Caitlin, if you have a million dollars, and you decide that next month would be a better time to invest, that’s exactly the same as me selling everything in my IRA today, and then reinvesting my million dollars on the same date as you.”
“That’s not the same thing,” said Caitlin.
“It’s exactly the same thing,” Tina replied. “I wouldn’t have to pay taxes on the sale. So if I try to time the market, by selling and re-buying, it’s exactly the same as you trying to time the market, by investing your million dollars at ‘the perfect time.’ Studies show that economists are no better at predicting the direction of the market than a chimpanzee.”
“But I don’t think I could handle it if the market dropped right away,” said Caitlin. “Do you think I should invest chunks of it over time?”
“Investing is all about putting probability in your favor,” said Tina. “Vanguard did a case study a few years back. They wanted to see if it would be better to invest a lump sum right away, or whether profits would be higher if the investor spaced out deposits over 6, 12, 18, 24, 30 or 36 months. They compared rolling 10 year periods for the U.S. market between 1926 and 2011. They analyzed the same scenario for the UK market (1976-2011) and for the Australian market (1984-2011). They found that investing the money all at once won 67 percent of the time.”
Caitlin sat for a moment to let that sink in. “So, you’re saying I’ll probably make more money, long-term, if I invest it all right now?”
“Based on probabilities, yes, that’s right,” said Tina. “But we should also respect your biggest risk.”
“You mean, a stock market drop?” said Caitlin.
“No Caitlin, that’s not your biggest risk. Your behavior is a far bigger risk. If you think a stock market drop might cause you to freak out, possibly making you sell your investments, then respect that. Statistically, you increase the odds of making more money if you invest it all at once. But if you think you might do something silly if the markets drop, then split your million dollars into chunks. You might invest $250,000 every quarter, instead of investing it all at once. If stocks do drop, after you’ve made your first deposit, this strategy might be easier on your nerves.”
“I guess, either way,” said Caitlin, “I have to channel my inner Zen.”
“Yep,” Tina replied. “An investor’s biggest enemy is always the one they face in the mirror.”
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas