IN BEN CARLSON’S wonderful book, A Wealth of Common Sense, there’s a vignette about Bob, the world’s worst market timer.
Bob is a diligent saver. But unfortunately, he’s cursed with horrible market-timing skills, plowing money into the stock market just before every major decline. For you market history buffs, Bob buys into an S&P 500 index fund on the following dates: December 1972, August 1987, December 1999 and October 2007. The subsequent plunges from these highs were 48%, 34%, 55% and 57%, respectively.
Shellshocked by each decline, Bob immediately retreats from the market, temporarily halting his stock purchases. But just as the market reaches the next major peak, Bob takes his accumulated savings and buys into the market.
Still, Bob has one saving grace—and it’s a big one. He never sells. As Carlson puts it, “He held on for dear life because he was too nervous about being wrong on his sell decision, too.”
As it turns out, Bob does okay. After 43 years of saving and investing, he retires a wealthy man in 2013—though his nest egg would have been twice as large had he simply dollar-cost averaged over the same time frame. There are many lessons in this story, but let me focus on just one.
When I first read this story seven years ago, I had one of my eureka moments. I realized that my fear of investing near market tops was overblown. No matter how poorly I timed my stock market buys, I would never be as unlucky as Bob. And if Bob turned out okay, so would I. This was an incredibly liberating insight.
I always remember Bob when I’m putting money to work in the market, as I am today. It’s never fun to watch an investment go down shortly after making it. Regret is a powerful emotion. But if you invest in a diversified stock portfolio and hold on for a decade or longer, just as Bob did, you should fare just fine.
My advice: Remember Bob when investing during volatile markets, such as the one we’re currently in. If you’re buying stocks today, you have already outdone Bob. But don’t forget the secret to Bob’s success. While Bob may have bought high, he never sold low. “Buy and hold” is a reliable formula for wealth creation.
I don’t 100% agree with this strategy. The fatal flaw in my opinion is how retirement times with the next bear market. What if you buy and hold right up to retirement and the market crashes 12 months before you retire? If that happens, you could be screwed. Thirty or forty percent of your portfolio could be up in smoke and you have no time to make it back.
There was another Humble Dollar article about the market being at an all time high. So I grabbed the S&P data back to the 20s. Turns out from 1928 to 2021 the S&P closed at its all time high 52% of the time.
This is a good example of illustrating the importance of a buy-and-hold approach to investing. However, it should be noted that it does involve a certain amount of cherry-picking. For example, if Bob had retired in mid-2009 his nest would have been about half as big as it was 4 years later. One can pick other starting and stopping periods that would have resulted in significantly more or less than what Bob earned in the example.
It is also worth noting that pointing out that even poorly timed investing is likely to be very profitable over a 43-year period doesn’t imply that the same holds for shorter time frames.
Without reading the book, sounds like to me that Bob accidently fell into dollar cost averging and compounding which are true long term keys to wealth and success, so says Warren Buffett.
On average, the best time to buy is yesterday. Today is the next best time, on average. Tomorrow, while in third place, is still on average better than the day after.
Nice work, John.
Instead of knowing “he retires a wealthy man in 2013”, it would be interesting to know the actual numbers in Bob’s scenario.
How much did he invest at each market high? What was his rate of return? What was his ending balance?
Bob saved $2,000 per year in the 1970s, $4,000 per year in the 1980s, $6,000 per year in the 1990s, $8,000 per year in the 2000s, and $10,000 per year in the 2010s. He retired in 2013 with $1.1 million. To reiterate: Bob never sold a single share.
Your article gave me the impression that Bob “plowed” money into the market right before the major downturns instead of simply making gradually increasing yearly investments.
As John explains, Bob keeps saving money each year — but he doesn’t put his accumulated savings to work in stocks until the next market peak.
Thanks, John. I hesitate at times when I think about “how high” the market is, wondering if I should wait to invest. If a company represents a reasonable value, the danger is waiting and not investing. Short term fluctuations will not be important in the long run.