Driving into work this morning, I noticed a new billboard had gone up advertising the new Bud Light Platinum. The sign had a picture of the bottle with the words “Every Night Has Potential” plastered across it. I couldn’t help but think that when it comes to your investments, “Every Day Has Potential”. Pretty catchy huh.
Many investors will try to time the market and get in when things are heading up, and getting out when they’re going down. The problem with that idea is that trying to time the market will rarely work in your favor. The stock market is a compounding machine. Over the long-term, companies produce products which you buy and they derive a profit from so-doing. These profits are called “earnings” and are either passed to the stock-holder via dividends or they are reinvested into the business for it to decide to produce cooler and better products which you buy…and the process is repeated. Over time, stock prices rise, dividends compound, earnings accelerate, and your wealth increases.
A few years back, I went to a Due Diligence Conference hosted by Davis Advisors where they showed the following chart (updated through 2011).
As you can see, trying to time the market can be quite dangerous. If an investor, let’s call him Bud, would have stayed the course from 1992-2011, he would have experienced an 7.8% annualized gain. However, if he would have decided to try to time the market, and ended up missing the 10 best days during that timeframe, his return would have only been 4.1%. If Bud would have been even more scared (probably listening to too much CNBC I would imagine), withdrew all his money from the market, and missed the 90 best days in that 20 year span, he would have ended up with a -9.7% annualized loss.
Bottom line, stay the course. Every day has potential.
