The Stock Market Looks Expensive: Should You Wait for It to Drop to Invest?

Just a glance at the price chart of a stock market index will tell you that stocks don’t go up in a straight line. Stocks go up in a zig-zag pattern, making peaks and troughs.

Wouldn’t it be wonderful if we could keep buying at troughs and selling at peaks? We’d all be extremely rich.

But the reality is it’s impossible. Even the best investors will tell you that timing the market perfectly is a pipedream. Yet, time and again, I still hear novice investors who are trying to do exactly that.

“The Stock Market Looks Expensive Now. Maybe I Should Wait for Another Day.”

This statement may seem innocuous and something that many investors are feeling now. It is also understandable.

The S&P 500 in the US fell by more than 30 per cent from 19 February 2020 to 23 March 2020 but has since recovered almost all of the losses. Meanwhile, COVID-19 cases continue to surge and lockdowns are still imposed in many parts of the world.

I’m not saying that I know for a fact that stocks will keep rising from here. However, trying to time the market over the long-term will likely do you more harm than good.

According to asset management firm Franklin Templeton, missing just a few of the stock market’s best days will severely damage your returns:

Staying fully invested over the 20 years leading up to December 2019 would have given you a 6.06% total annual return.

However, if you miss just the best 10 days and your return would fall to only 2.44% per year.

Miss the best 20 days, and your return drops to a negligible 0.08%.

Miss the 30 best days and you are looking at a -1.95% annual loss. That would be 20 wasted years of investing.

I can draw one simple conclusion from this: The risk of staying out of the market is huge.

Because of this, I much prefer a way less risky, albeit boring, the approach of staying invested. By doing this, I know that I will not risk missing out on the best trading days of the market.

Less Stress

Timing the market is also extremely stressful. Even for investors who are able to get it right once in a while, do the extra returns justify the effort?

You’ll need to constantly monitor the market, find opportunities to buy and sell and are likely to still end up messing things up (see above).

Imagine you sold your investments just before some of the best trading days occur and the index/stock you are investing in never goes back to where you sold it at.

As a result, you’d have missed out on some gains.

And what would you do next? Would you be able to convince yourself to buy back in at a higher price than you sold?

You will likely continue compounding your mistake by never investing again. That’s a big mistake as historically the stock market generally tends to keep reaching new highs.

Final Words

Time is your greatest friend in investing. There will always be reasons not to invest in the market.

The legendary investor Peter Lynch once said:

“Wall Street makes its money on activity; you make your money on inactivity.”

Investors who are tempted to time the market should remember these wise words.

This article first appeared on The Good Investors and is part of a content syndication agreement between The Good Investors and Seedly.

The Good Investors is the personal investing blog of two simple guys, Chong Ser Jing and Jeremy Chia, who are passionate about educating Singaporeans about stock market investing.

If you have any questions about this stock and other stocks in general, why not head over to the SeedlyCommunity to discuss them with like-minded individuals?

This article was originally posted on 8 July 2020.

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock.