The Importance of Investment Time in Market

Basic Ground Rules for Do-it-Yourself (DIY) Investing

Before diving into the financial markets, financial professionals strongly suggest that investors first establish an emergency fund covering at least three months of normal household expenses. This fund provides a safety net for unexpected costs or an unplanned job loss. Having this emergency fund is crucial because it supports the basic strategy that requires investment money to remain invested in the market long-term.

Indeed, time in the market is considered the most significant factor among the key ingredients needed to build wealth. Alongside this, continuing to invest regularly—even if the amounts aren't large—is another important factor, as keeping money consistently invested allows DIY investors to fully leverage the power of “compound interest”.

3 Key Factors Needed to Build Wealth

1) Investment Contributions
2) Return on Investment
3) Time in Market

“Time is the most important contributor to wealth creation.” – John Bogle Vanguard Founder

Three Life Blessings

It is often been said that the three great blessing in life are Health, Wealth, and Time. However, it is not uncommon at the various stages of life to have no more than two of three of these blessings.

Typical Blessing by Age Bracket

Young Adults typically lack wealth but generally have good health and have the luxury of time (to invest) and built their wealth. Middle-Aged Adults are generally healthy and have built a fair amount of wealth, but often lack time to enjoy life. Finally Seniors often have less than perfect health but have built their wealth over a lifetime of work but can also suffer from an abundance of idle time.

Investment Horizons by Age

Potential Investment horizons are heavily impacted by age and overall health. For example, a 40-Year male non-smoker of average health is expected to live on average to 85 while Females live to 90. This makes their potential investment horizon 45 and 50-Years for Males and Females respectively.

Keeping $ Invested Allows for Interest/Dividend Compounding

• Assume $ 100,000 Invested @ 6% Compounded Quarterly
• Assume Interest/Dividend reinvested via Dividend Reinvestment Plan (DRIP) or ETF Reinvestment
• Investment periods of 10, 20, 30, 40, 45 and 50-Years

Results

Reinvesting or compounding has a huge impact of balances as time in market increases. This requires the money stay invested and is reinvested back into the market @ 6%. For example, @ 6% reinvested quarterly after 30-Years the asset balances grows by almost 6x. Further, after 50-Years the balance grows by nearly 20x its beginning balance.

“Compound Interest is the eighth wonder of the world” - Albert Einstein

Importance of Staying in the Market

As shown in the chart above, missing only 10 of the best “bounce-back" days of market recovery can lower the investor's Long-Term Annualized Return by more than 4%.

‍

“Activity is the enemy of investment returns.” – Warren Buffet

“The real key to making money in stocks is not to get scared out of them” - Peter Lynch

“The stock market is a device for transferring money from the impatient to the patient" - Warren Buffet