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.