It's Never a Good Time to Invest in the Stock Market - Do It Anyway

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Is it ever a good time to invest in the stock market? Not really. Looking back at history, there have been plenty of reasons to sit tight with your cash and wait for a better time to put your money in the market.

Consider just a few of the scary events that have shaken even the most experienced investor's confidence in the future of the national and global economies:
  • 1950s: Korean War, creation of the Warsaw Pact, Cuban Revolution
  • 1960s: Cuban missile crisis, Vietnam War escalation, American spy plane shot down over Soviet Union
  • 1970s: Arab oil embargo, Stagflation, Watergate
  • 1980s: Savings and Loan crisis, Latin American debt crisis, failed military attempt to end the Iranian Hostage Crisis
  • 1990s: Asian financial crisis, Persian Gulf War
  • 2000s: September 11 attacks, subprime lending/housing meltdown, Great Recession
  • 2010s: Nuclear threats from North Korea, Greek bailout and eurozone crisis, mortgage delinquencies peak above 14 percent

Still, throughout it all, investors who kept on keeping on throughout the decades wound up making money over time, even with the rough patches that hit every single decade.

The 20-Year Time Horizon

If you want investing to really work out for you, you need at least somewhere in the neighborhood of 20 years to let it work its magic on your behalf.

Why 20 years? There are basically two reasons that's the magic number.
  • First, the longer you have to invest, the less you need to put away each paycheck to eventually reach your goal.
  • Second, while the market has generally moved up over time as companies and the economy grow, not every year is smooth sailing for investors.
If you put less time into it, you might still be able to reach your goals, but it'll take more invested cash on your part and you'll be more reliant on the market moving in your favor over a shorter time frame.

Time Really Is Money

The chart below shows you how much you'd need to sock away every month to reach a $1 million nest egg, based on various potential rates of return and years investing in the plan:


Data from author's calculations. Assumes monthly contributions and compounding.

With enough time and discipline to sock away cash for an entire 40-year career, retiring a millionaire is a fairly straightforward proposition, especially if you're investing in a tax-efficient manner (by putting the money in your IRA and 401(k) or other company sponsored plan) and achieving 8 percent to 10 percent annual returns. That 8 percent to 10 percent annual rate may seem high, but in reality, it's about in line with what the S&P 500 (^GSPC) has achieved on average over time, with dividends reinvested.

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But notice how much higher each group of bars is than the group to its left.

Indeed, once you have fewer than 20 years left, the amounts you need to save to reach your goal start getting painfully high, especially for those who have never invested before and have gotten used to living on their full salaries.

And if you think it's tough to come up with around $1,500 per month to invest for 20 years, imagine how much tougher it'd be to come up with the nearly $5,000 per month it'd take for you to get there in only 10 years.

Time Heals Many Wounds

The other reason that 20-year time period matters so much is because of Benjamin Graham's famous quote on how the market behaves.

Graham, the man who taught value investing to Warren Buffett, noted that over the short term, the market acted like a "voting machine," but over the long term, it acted like a "weighing machine."

In other words, on any given day, the market acts something like a popularity contest, voting up and down stocks based largely on its mood. But the longer your time frame, the more closely the overall returns on stocks match the true performance of the businesses they represent. A time frame of 20 years is enough to let the market's "weighing machine" take over.

Because of that, you're more likely to get a solid return, in line with true company growth rates, over a longer period of time than you will in any given month or year.

As the chart below shows, looking back to 20-year periods starting in 1950, the market's annualized returns have generally been positive and within a fairly narrow range between around 2.4 percent and 14.4 percent. And don't forget, during each of these time periods investors faced some pretty earth-shaking events, such as those listed above.


Data from Yahoo! Finance. Comparing month end to month end, 20 years apart.

For contrast, if you look just at one-year periods rather than 20-year periods, the returns range from negative 44.8 percent to positive 52.9 percent over the same time frame, which is some incredible volatility.

While there are no absolute guarantees in investing, the odds are a lot more in your favor that you'll hit somewhere near a reasonable rate of return the longer your time frame. With 20 years or more to let the market work its magic for you, you have a pretty awesome chance at winding up successful.

Chuck Saletta is a Motley Fool contributing writer. For more on long-term investing see The Motley Fool's free report "3 Stocks That Will Help You Retire Rich." The best investing approach is to choose great companies and stick with them for the long term. This free report names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of.

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It's Never a Good Time to Invest in the Stock Market - Do It Anyway

(DIS)

This childhood favorite is a lot more than theme parks and cartoons. With ABC and sports powerhouse ESPN under its corporate umbrella, Disney is a media giant. Over the past decade, it bought Pixar and Marvel Entertainment, and Disney's recent pickup of Lucasfilm will give the House of Mouse access to the blockbuster "Star Wars" franchise for years to come.

(SBUX)

As a Starbucks shareholder, seeing lines around the corner for coffee will put a smile on your face. Consumers still seem happy to spend big money on its java, and its new growth initiatives are aimed at expanding its sales of juices, tea and baked goods, too.

(IBM)

IBM may be best known for its computer hardware, but the company has diversified to become a one-stop shop for IT services, and IBM has enjoyed better profits as a result of that strategic shift. As it gets more involved in the hot cloud-computing area, look for even more opportunities ahead.

(XOM)

You may drive by the biggest U.S. energy company's gas stations every day, but the oil giant's operations go well beyond the pumps around the corner. ExxonMobil's extensive global oil- and gas-exploration operations are leaving no stone unturned looking for new sources of fossil fuels. Owning some ExxonMobil stock lets you profit from those high prices you've been paying at the pump for so long.

(AAPL)

Apple products may never seem to be available at a discount, but Apple's stock is a relative bargain these days. With shares more than 25 percent off their recent highs, some analysts fear that Apple's best market-cap growth may be behind it. But with the latest iPhone, along with new products in its iPad and Mac lines, Apple has bright enough prospects to lure value investors into looking closely at the stock.

(PG)

With dozens of consumer products bringing in upwards of $1 billion in annual sales, Procter & Gamble is a household name around the world. Investors will especially like P&G's dividend record: 56 straight years of payout increases, giving shareholders consistent, reliable income.

(JNJ)

Johnson & Johnson is ubiquitous in medicine cabinets and hospitals everywhere, thanks to products from Band-Aids and Tylenol to high-end medical equipment and pharmaceuticals. Plagued by recalls in recent years, J&J nonetheless has an impressive dividend yield of 3.5 percent and has given long-term investors half a century of annual dividend increases to boot.

(KO)

Beverage giant Coca-Cola has the No. 1 brand in the world, and it's made the most of it by expanding across the globe to find new growth opportunities. Sales in North America have been less than stellar, but with emerging economies increasingly interested in the kinds of consumer products that the developed world takes for granted, Coke has huge potential to become as widely consumed around the world as it is domestically.

(BRK-A) (BRK-B)

Warren Buffett may be in his 80s, but the Oracle of Omaha is still a force to be reckoned with in the investing world. With the company's recent decision to repurchase shares near their current price, new shareholders can feel confident that the stock's a good value right now in the eyes of at least one renowned investing guru.

(MMM)

Best-known for innovations like Post-it Notes, 3M is actually a massive conglomerate doing business in defense, health care, and electronics as well as office supplies. With its 2.5 percent dividend yield and 54 years of consecutive annual payout increases, shareholders will like the way 3M treats them.

(DEO)

This beverage company's name may not be familiar to you, but if you drink even occasionally, you certainly know its brands: Guinness, Johnnie Walker, Smirnoff, Captain Morgan and many, many more. This British alcohol giant has some of the strongest brands in the world and has been expanding across the globe in search of new growth opportunities. In a recession-resistant business, Diageo is a powerhouse.

(MCD)

McDonald's has been the king of fast food for decades, but the company has also been nimble, getting into smoothies and premium coffee at exactly the right time. The stock has historically done well during tough times, so owning it gives your portfolio some protection from a possible downturn.

(WFM)

Dubbed "Whole Paycheck" by many, Whole Foods has nevertheless captured a loyal customer base with its organic food and other healthy offerings. The stock isn't cheap either, but with plenty of untapped growth potential, Whole Foods is worth paying a little extra for.

Now you have a baker's dozen strong options to choose from, so get 2013 off on the right foot by putting your money to work. The stock market will have its ups and downs this year -- as it does every year -- but over the long haul, stocks have a great chance of outperforming the minuscule returns you're getting from your savings accounts and CDs.

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