July 16, 2024

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Schwab Research Reveals the Optimal Way to Invest

2 min read

An investor who tries to time the market stresses as he decides when to set a stock.

Can investors realistically time the market to maximize returns, especially over the long term? According to a recent study from Charles Schwab, perfect market timing is practically impossible. The firm’s research showed that most investors are better off investing as soon as possible using a buy-and-hold strategy rather than trying to predict short-term peaks and valleys.

Do you have questions about managing your investment portfolio? Speak with a financial advisor today.

Breaking Down Schwab’s Study: Market Timing vs. Other Strategies

To produce their new study, researchers at the Schwab Center for Financial Research analyzed the hypothetical 20-year returns of five investing strategies using historical S&P 500 data. Each hypothetical investor received $2,000 every year, which they could invest however they like.

The investors took the following approaches:

  • Perfect market timing: One investor invested $2,000 each year at the S&P 500’s lowest trading point.

  • Immediate investing: One investor put $2,000 into the S&P 500 on the first trading day of each year.

  • Dollar-cost averaging: Another investor split the $2,000 into 12 equal allotments and invested one portion on the first of every month.

  • Poorly timed investing: One investor invested the entire $2,000 at the S&P 500’s highest point of the year every year.

  • Treasuries: The final investor avoided stocks altogether and instead put their $2,000 into U.S. Treasury securities each year as a cash proxy and left it there.

Not surprisingly, the study found that perfect timing delivered the best returns. However, investing immediately was a close second, trailing the results generated from perfect timing by only about 8% over 20 years.

Put another way, not trying to time the market at all earned 92% as much as timing the market perfectly. In dollar terms, the difference was $10,537, with perfect timing returning $138,044 and no timing…

2023-12-03 10:27:00

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