A Tale of the World’s Worst Investor

By Ben Carlson

This month, we look at a recent blog post from Ben Carlson of Ritholtz Wealth Management. In this post, Ben simulates a fictional character, Bob, who is the world’s worst market timer. Over the course of Bob’s 43-year career, he saves money regularly, but only ever buys stocks right before they crash.

So, how do Bob’s investments do over time?

Let’s look at the situation in more detail. In the scenario, Bob plans to save $2,000/year starting in 1970, increasing that amount by another $2,000/year every 10 years (2k/year in the 1970’s, 4k/year in 1980’s, 6k/year in 1990’s, and 8k/year in 2000’s, retiring in 2013 at 65 years old). He saves all of that money in cash and decides to invest it into the S&P500 only at market peaks. Fortunately, he never sells investments that he has made.

Here’s how that looked:

• He invested right before a 50% crash in the early 1970’s
• He doesn’t buy more stocks again until 1987, where he buys $47,000 worth of stocks just before the market slid 30%
• He continues to leave that money invested and save cash, not buying again until December of 1999 when he invests $68,000 right before a 50% sell off with the tech bubble.
• Again, he leaves that money invested and saves cash, deploying another $64,000 in 2007 right before the financial crisis.
• In total, Bob invests $184,000, picking only the worst moments over that period to invest.

So, Bob’s timing is clearly poor, but he does have one superpower – staying invested (which is easier said than done, considering in ¾ scenarios he lost roughly half his money right off the bat).

But, even with his terrible timing, Bob still manages to end up with roughly $1.1M in his portfolio in 2013 when he retires at 65.

So, what are some of the lessons that we can learn from Bob’s journey?

• It pays to be an optimist over time.  Long-term thinking has historically always been rewarded.  Even when things look bleak, human kind has always continued to innovate and and advance in the long haul.
• Volatility is a feature, not a bug.  While investors may feel like bad for a period of time during market volatility, significant wealth is not made by avoiding downturns but rather sticking with a plan and accounting for the volatility that comes with investing from time to time.
•  Saving regularly and letting compound interest work over time are the best accelerants to compounding wealth, regardless of picking individual stocks or building a complex investment strategy.

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Advisory services offered through National Wealth Management Group, LLC, a Registered Investment Adviser. This information is intended for educational purposes and is not intended as a recommendation to buy or sell securities. Investing involves risk. Before investing, you should consult with a financial advisor to determine how a specific investment strategy fits your personal goals and objectives.