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Welcome to the Stay Wealthy Podcast with Taylor Schulte. This is not Taylor Schulte, as you may have noticed. My name is Jeremy Schneider. I'm filling in for Taylor for the month of June. Taylor was kind enough to let me take over his podcast while he was taking some time to hang with his family, take a breather, and re-energizing after a busy start to the year. He'll be back on the mic in July with plenty of new episodes. Until then, you are stuck with me. So as a bit of an introduction, I'm going to be talking about
serious fans of the podcast that might remember me from episode 64 when we talked about why rent versus buy is the wrong question. Or you may also remember me from last summer where I also guest hosted five episodes of this very podcast. So if you like me and want to hear more, go back to those five episodes from last July. I'm not here to talk about myself, but just for some context, if you want to know who this guy is, my name is Jeremy Schneider. I'm
A bit about my story is I started a company in college, an internet company, which I grew for about 12 years. And I sold it at the age of 34 for just over $5 million. And then at the age of 36, I was able to quit my job and follow my passion for personal finance. So I'm not a financial professional. I'm not a CFP or a financial advisor.
I would consider myself a serious hobbyist. But what I do is I basically teach about personal finance and investing. I have an Instagram called Personal Finance Club. You can find it at Personal Finance Club on Instagram. I have about 250,000 followers there. Actually, I just looked up last July when I did this last time. I only had about 80,000 followers. So
I don't know what that means. I have three times as many followers. I guess that's good for something. But yeah, that's what I do. I'm also on the tickety talks if you're a kid, as they say, tick tock, I guess. Yeah, so that's my story. But let's get to it. So this is episode number 111, 111. And if you want to find the show notes, or you want to find the links for this episode, you can go to youstaywealthy.com slash 111. So
As a financial or investing educator or financial influencer or whatever you want to call me, I get a lot of questions and a lot of the questions sound like the following. Is now a good time to buy or sell? Should I be investing now at an all-time high? Isn't the market due for a crash? Should I be moving to gold or crypto in anticipation of this out-of-control inflation that we have coming?
What do all these questions have in common? Well, in my opinion, all these questions are under the umbrella of timing the market.
Timing the market is any change in decision-making based on what you think the market is going to do rather than your own personal timeline. So sometimes you want to buy or sell, but those decisions should be based on your life, not based on your guess about what the market is doing or going to do. So for example, a good decision about your own asset allocation, for example, would be something like this. A good decision would be, I plan to reallocate towards bonds as I age, as I anticipate being a more conservative investor in my golden years.
That's about your own timeline. And you say, hey, when I'm 70, my opinion about capital preservation might be very different from when I'm 40. And so I'm planning to reallocate towards bonds over those 30 years. That's a good type of asset allocation decision. A bad one, which involves timing the market, is something like this.
I plan to move towards bonds to weather the storm during the pandemic. So for example, a year ago, or a little bit more than a year ago now, and let's say March or April of 2020, when the market was having those like crazy fluctuations, like up and down 10% a day sometimes, if you decide to weather the storm and exit the market for the year of 2020, when the pandemic was at its worst, you would have missed
The 2020 market was actually up about 18%, including dividend growth in 2020. So even though we saw a huge crash in 2020, the market recovered. And so if you removed yourself from this pandemic year, you would have missed an 18% gain. That is one of the dangers of timing the market. I also hear so much about investing in the market at an all-time high.
I heard this in 2013. So the question is something like, should I invest at an all-time high? And right now it's a hot topic because the market is basically at an all-time high. And I also heard this question a lot in 2013. And I heard it in 2014 and 2015 and 2016 and 2017 and 2018 and 2019 and 2020. And I'm hearing it again in 2021. And do you know why I heard it in all those years? Because every single one of those years for the last, whatever it was, eight years, we have...
enjoyed an all-time market high. But if you could, would you go back and invest at the all-time market high in 2013? I sure hope so because the market is actually up about 158% since then because the market generally goes up as it measures the total economic output of the US or global market, whatever it's measuring. To illustrate this, I actually did a little bit of an analysis. I
I went and downloaded 150 years of the US stock market, which we enjoy a very nice long track record in the US. It's like very easy to measure because we have great data for that. So I went back and looked at 150 years of the US stock market and did analysis and looked at only the months where the market was at a record high.
Over that time, there have been 298 such months. In fact, about 17% of every month over that period, the market was at an all-time record high. So about 17% of the time, the market is breaking the record. If you look at only those months, and then you look at the 12 months following those months, the average return for the year, for the 12 months following an all-time record high,
is about plus 11.2%. So if you just invested during those years, or during those months that were an all time record high month, and you looked at the following year performance, you actually would be getting 11.2% return. And so when you say, you know, when you think about the all time US stock market returns being about 10%, on average, over the last 100 plus years,
If you look at just the months that are record highs, you'd actually do better than average. Of course, it's not possible to invest just at record highs because you'd have to be holding cash on the sidelines waiting for the market to be at a record high sometimes. That would hurt your return. But if we do happen to be at a record high, there's no reason to keep your money out of the market. In fact, you should be happy that we're in this bull run and expect it to continue to go up because that at least is what has happened historically speaking.
I think a lot of people have an incorrect mental model about the stock market. They basically think it's like a yo-yo that goes up or down. And you hear, if you watch the news, or you watch CNBC, or even if you read the newspaper, you hear about crashes, and you hear about record highs, and you kind of think it's an up and down situation, but it's really not. It's more like a yo-yo as you're walking up an infinitely long set of stairs. And so,
In the short term, the yo-yo is going to seem like it's most of the action. But over the long term, the stairs that climb up is what really makes a difference. And in the short term, the market can be a little bit unpredictable. You know, sometimes as you're stepping up, the yo-yo is going down. Sometimes as you're stepping up, the yo-yo is going up. And so you see like a little downswing and then a big upswing or a big downswing and a little upswing. But
As long as you're on that ride, on those stairs going up, you're going to realize that long-term growth. That's the real mental model. And it's possible for this infinitely long upward stair growth because the market is really a measure of all former total economic output. So those dividends that are being paid when you're measuring growth of the market are getting reinvested into the market and
getting more and more. So it's almost like an odometer going up and up and up as you measure the total economic past output. Or in case of your own portfolio, your portfolio is collecting all those dividends, reinvesting, buying more shares and going up and up and up. So it really can keep going up.
So the title of this episode is the simple strategy that beats timing the market. And so I want to tell a little bit of a story about this very simple strategy. And the story involves three investors. Their investors' names are Tiffany, Brittany, and Sarah. And all three of these investors invested $200 per month
And they only invested in the S&P 500. And they each did it over a 41-year period from 1979 through 2020. But they all had different strategies about when to jump into the market. So Tiffany and Brittany, our first two investors, knew that the market could be volatile.
And they planned to avoid the crashes. So if you look over the last 41 years, why 41 years, by the way, not 40? Well, because the first time I did this analysis was a year ago. And I added an extra year instead of shifting the timeframe just so I get more data in this analysis. But
That's what it is. From 1979 to the end of 2020, there have been five major market crashes. One was Black Tuesday in 1987. The market crashed about 33%. I think it crashed about 25% in a single day. And there's reports of people throwing themselves off a building and stuff in response to this terrible market crash. Then in the early 90s, there's the Kuwait War, where the market dropped about 20%. Then in the early 2000s, the dot-com crash. The market dropped about 49%.
Then in the 2007 to 2009 timeframe, there is the financial crisis where the market dropped 56%. And then of course, just last year, this is now a very recent memory, the COVID crash where the market dropped about 34%. So there's these five kind of very big, dramatic market crashes. And so Tiffany, our very first investor who has saved $200 per month, she put all of her money into a savings account, earning 3% interest, waiting for the perfect time to invest.
But as it turned out, Tiffany is the world's worst market timer. Instead of investing at the perfect time, she invested the worst time. And she invested at the day before each of those five crashes. So she saved $200 a month in a savings account. And then the day before the 1987 Black Monday crash, she put all of her money in the market and then washed it all tank.
But she never sold. She continued holding those shares of the S&P 500 index fund until today. And then her new money, she saved again in the savings account and invested the next market peak. And then her new money, she said, again, that's the next market peak. So that's what she did. So over the course of those 41 years, she actually saved $99,000.
But thanks to her buy and hold strategy, Tiffany's $99,000 turned into over $773,000. So she more than seven times her money. So even though Tiffany had the world's worst market timing, and by the way, it's impossible to have timing this bad. Nobody knows the day before the crash. And if you did, you could obviously do much better than this. So this is like a
theoretical, worst case scenario, investing the day before the crash. Still, even though she did this, thanks to her buy and hold strategy, she turned her $99,000 into $773,000. By the way, all of our investing ladies here have very alliterative names where their names represent their investing strategies. So Tiffany, terrible timing, tease. Brittany,
On the other hand, Brittany buys at the bottom. Brittany buys at the bottom. She buys low. So she also saves her $200 a month. But instead of investing at the day of the very top of the market peak, she has like the omniscient, perfect, only hypothetically possible, perfect possible timing. She invested the very bottom of the stock market. So instead of investing at the day before the 1987 Black Monday, she invests at the very bottom of the market. As the bottom is like the day, that's the very worst
And then she saves up her money and then invests again at the bottom of the next market crash, and then invests again at the bottom of the next market crash. And so Brittany has the world's best market timing. So her $200 per month, or her $99,000 over the course of 41 years, turns into $1.1 million.
So it's about 45% better than Tiffany, which kind of makes sense because those crashes were all about 40% or so, you know, between 30 and 58% or whatever. And so on average, she's going to do 45% better. So instead of Tiffany's $773,000, Brittany's 1.1 million is obviously much better. And it makes sense because if you could invest at the bottom, you obviously would. But there's one other strategy, and this is slow and steady Sarah.
Sarah didn't have much interest in watching the market or trading at all. In fact, Sarah only did one thing. On the day she opened her account in 1979, she set up a $200 per month auto investment in an S&P 500 index fund and never looked at her account again. She invested on the up months, on the down months, at the top of the crash, at the bottom of the crash. She just put her money in every single month and never made a trade other than her periodic purchases.
And what did her strategy net her? Instead of Britney's 1.1 million, which was Britney who bought at the bottom of the market, slow and steady Sarah ended up with over $1.6 million. So even her slow and steady approach
crushed even the perfect market timing. How is that possible? Well, it turns out the market is usually going up. And so if you are someone who's waiting for a 30% pullback, you might have to wait for a 200% gain. And so that's what happened to Brittany. As she was waiting for the dot-com crash, she missed the 90s.
As she was waiting for the financial crisis, she missed another doubling the market. As she was waiting for the COVID crash, she missed 2013 to 2020. Those were amazing years in the market. So if you're keeping money on the sidelines waiting for a crash, even if you have perfect timing and can pick the exact bottom of every 30% crash or every 20% crash, you're still going to be worse off than just putting the market money in early and often.
So hopefully that made at least a pretty convincing argument on some reasons not to try to time the market and rather to invest early and often. But sometimes there's another decision in this realm that you have to make. And that is when you get a lump sum of money. So let's say you get a big bonus at work, like far above and beyond your normal monthly pay, or you could receive inheritance, or you get a lawsuit settlement or lottery winnings.
and you have this big lump sum of money, what do you do with it? Hopefully, you know that the wrong thing to do would be to hold on to it until the right moment to jump into the market, because that's much more likely to hurt you than it is to help you. But you're still left with two choices. The first choice is what's called lump sum investing, which is just dumping it all directly into the market, which is a perfectly good option, by the way. Then the other option is what's called dollar cost averaging. And people love the term dollar cost averaging. I'm sure you've heard it. People love saying it. I don't know why. It just rolls off the tongue or something. But
But I'd like to make a differentiation between what dollar cost averaging is, in my opinion, and sometimes when I think it's misused a little bit inappropriately. So if you, for example, are investing in your 401k, every month it's coming out of your paycheck, I would call that periodic investing. That's just investing early enough in normal investing. Dollar cost averaging is a specific decision to break up a lump sum and spread it out over a period of time. And so, for example, let's say you've got an inheritance of $120,000 cash. You
you could break it up into 12 pieces of $10,000 and invest $10,000 a month for 12 months, instead of just dumping it all in at once. And so that is why I consider dollar cost averaging as opposed to just periodic investing, which is just normal monthly investing. One
One note on dollar cost averaging is I would never recommend doing this if you were transferring accounts or rolling over an account. So for example, let's say you have an old 401k that's invested with your previous employer and you rolled over to a rollover IRA. That is not an opportunity for dollar cost averaging because that money has already been in the market. Keep it in the market. If you
pull it out of the market and then dollar cost average back into the market, that in my opinion would be a form of timing the market because why now are you pulling it out of the market and slowly getting back in? So if you're ever just converting between accounts or doing anything else that's moving money around that already is in the market, leave it in the market. That's not really an opportunity to dollar cost average. But let's say you do receive an inheritance or sell a property or something like that.
I think it's perfectly reasonable to feel in your gut a fear about dumping all of that money directly into the market. I have felt that
fear myself. And so to analyze this, I actually did another little bit of research. And I, again, downloaded the past 150 years of the stock market. And I looked at how you would fare if you were dollar cost averaging versus lump sum investing. And so I looked at investing over a 20-year period and either dollar cost averaging over a 12-month period. So you spread it out over the first year and then hold it for the remaining 19 years, or you just dump it in on day one and hold it for 20 years. And it turns out
when you compare those two options, lump sum investing wins 71% of the time. So if you look at the past 151 years or 150 years of the stock market, lump sum investing wins 71% of the time. And it turns out they're pretty close because the big difference between those two is really the 19 years that follows, not whether you're spreading out over the year or not. You know, lump sum or sorry, dollar cost averaging can win sometimes. So for example, if you got an inheritance of
on January 1st, 2000, you would have been better off dollar cost averaging as the market fell during the dot-com crash, but it wouldn't have really made that much of a difference. Which one should you do? Well, I think it really depends on your gut. So for example, last year during the pandemic in May of 2020, I actually sold a property and had about $600,000 of cash and I wasn't planning to buy another property with that. So I wanted to put it into the market. And
I decided to dollar cost average. I went against the odds. I went for that 29% where I thought, hey, this is a crazy time. We're in the middle of this super volatile pandemic. The market's up and down.
Who knows what the future is going to hold? I decided to spread that out. And I think I did only over six months because I know the longer you spread it out, the less likely dollar cost averaging is to win. So I spread it out over six months. And guess what happened over the next six months? The market went straight up. So I was actually worse off dollar cost averaging. I was a victim of the odds. That was one of those 71% of the months where I would have been better off lump summing it in. But that said...
It's very, very close. And I actually have a calculator on my website. It's the dollar cost average versus lump sum calculator. And you can put in the number of months you choose to dollar cost average and the time period you're planning to invest. And it shows you historically which one would have been better and how much each one would win by. It turns out they're very, very close. And so if
Dollar cost averaging makes you feel better. If it makes you feel better slowly getting to the market, then I say go for it. Because what you don't want to do is put all your money in the market, have the market drop by 20%, and then panic and pull it out and make a really bad decision with timing the market. We're going to miss the gains. And so it can definitely be mentally much easier on yourself if you slowly move to the market. That said, historically, statistically, you're better off throwing it all in lump sum. So if you have the stomach for it, I say go for it. If
If you want to play with this even further, I have yet another fun game on my website. It's called the Time the Market Game. And I think you can actually just Google Time the Market Game. And my website, personalfinanceclub.com is the first hit. And it basically lets you, it picks a random, I think like 10 year period, unless you buy and sell as much as you want to that 10 year period, as you watch the live market, like go up and down. And you can see if you can predict the drops. And
You can sell high and buy low or do your best to do it. It turns out that sometimes people win this game, but they only win about 30% of the time and they lose about 70% of the time. And so you have to ask yourself, is that 30% lucky just by randomly clicking? Or can you really time the market? And I think...
The more you look inward and the more you look at your past decisions, at least that's what I do. I just decide the times that I have timed the market and one, I've gotten lucky. And like last year when I did a dollar cost averaging instead of lump sum, I lost. And that was because I didn't know what was going to happen.
Okay, so that wraps up our topic of the day about timing the market and the optimal strategy for timing the market. Hopefully, I have made a convincing argument that investing early and often is basically your best option when you're deciding when to get into the market. Last year, I did this when I guest hosted the podcast. I had some questions from my Instagram followers. I'm going to bring it back this year. We have one question today. It's from Daniela from Palm Springs. And here is her question. How do you overcome the fear of investing?
My husband and I grew up very poor and the thought of spending money investing instead of keeping it all in a savings account
It's terrifying for us. Well, hi, Daniela. Thank you for the question. And I feel for you. Investing can be a very scary landscape to dip your toe in for the first time. I think just pop culture associated with investing, like Dogecoin and GameStop and guys on Wall Street frantically waving pieces of paper over their head, shouting buy and sell. And it just feels like gambling that's played by these big stakeholders. And how could you possibly get into it? And so I feel like it's a crazy thing to get into. And
But what I would suggest to you is that all that craziness when you say you're afraid of losing all your money, that is all noise. That is all nonsense. Real investing is all about buying assets that provide income and go up in value over long periods of time. And so you're not making a bet. You're not gambling. You're not guessing. You're just simply buying something that provides value and you're holding it for long periods of time. And there might be some volatility along the way. Maybe...
Six months from now, someone's willing to pay you a little bit less than you paid for it. But that's okay because you plan to hold it for a long time. And so what you do, the first thing I would say is to educate yourself. Listening to this podcast is an excellent start, by the way. Another book I might suggest is The Simple Path to Wealth by J.L. Collins. He really does a great job breaking it down nice and simply.
the exact things that we talk about in this podcast, buy and holding this really common sense investing. And I think once you read a book or two or start listening to some podcasts, you start to see, it starts to cut through the noise about all that stuff I talked about, the scary stuff. And you start to see, okay, wait a minute, this is actually a pretty simple thing to do. Buy and hold for long-term and let the investments do the work. So the first thing I say is do to educate. And the second thing to do is just to get started very small.
And so the cool thing about investing is that you don't need to put your entire life savings on the line right at the beginning. And so we just talked about time in the market and dollar cost averaging. But if you are afraid to get in the market, just start with a tiny amount of money. Like let's say, you know, it depends on, you know, your personal...
bank account and stuff like that. But let's say maybe $100 per month for a year. So you take $100 per month, and you could go and open a Fidelity account or a Schwab account or an E-Trade account or whatever, and just put $100 a month in and buy some index funds. So Fidelity, for example, offers $0 minimum index funds. And you can just put $100 a month. You can buy those index funds. And what's going to happen is after the first month, you're going to see $100 in there, and it's going to change a little bit. It might be $103 or it might be $98. And
And then the next month you put another 100 bucks in there and maybe it's 210 bucks. And then after the year's up, you're going to have put 1,200 bucks in, but your balance will no longer be 1,200. It's going to be something slightly higher or lower. If the market's up 10%, the historical average, you'll have made 120 bucks.
Not quite that because you didn't put it all in at the beginning of the year, but you get what I'm saying. It's going to go up or down. I think it's going to start to just watching that and getting a sense of it and being able to log in and see that your money is still there and see that nothing crazy is happening and it's not all disappearing. You can take it out if you want, if it's a regular brokerage account. I think that's going to get you more comfortable. Then maybe next year you start doing $200 a month. Next year you start doing $300 a month and you start ramping that money up and then you're going to start building some real positive wealth.
Thank you, Daniela, for the great question. I know you can do it. I'm proud of you for getting started. That is it. That is all I have for you today. For the links and resources I mentioned in the show, you can head to youstaywealthy.com slash 111. Thank you for bearing with me as I try to fill Taylor's very large podcasting shoes. I'll leave you today with my two rules of building wealth. Rule number one is to live below your means. And rule number two is invest early and often. See you next week.
This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. ♪