Wait For The Crash vs. Invest Now — The Real Numbers (from the book JUST KEEP BUYING)

The biggest market crash that ever took place was in 1929 when the market dropped by 89. 2% Just for comparison, in 1999 during the dot-com bubble, the market dropped by 78%. In the 2008 crisis, the market dropped by 54. 1%. So, it's not hard to see that 1929 is the biggest crash ever to take place in US history. Now, imagine you are dropped in the year 1920 and you have to invest in the US stock market for the next 40 years. You have two investment strategies to choose from. Number one, dollar cost averaging DCA. You invest $100 every month for all 40 years. Number two, buy the dip. You save $100 each month and only buy when the market is in a dip. Such as during the 1929 dip. But, I am going to make the second strategy even better. Not only will you buy the dip, but you will also have god-like powers. This means you will know exactly when the market is at the absolute bottom. This will ensure that when you do buy the dip, it is always at the lowest possible price. So, which strategy would you choose? DCA, dollar cost averaging, or buy the dip? Logically, it seems like buy the dip can't lose. However, if you actually run the simulation, you will see that DCA, dollar cost averaging, outperforms buy the dip over 70% of the time. This is true despite the fact that you know exactly when the market will hit a bottom. As you can see from the graph, when buy the dip ends up with more money than dollar cost averaging, it is above the 0% line. And when it ends with less money than dollar cost averaging, it is below the 0% line. What you will notice is that buy the dip does quite well starting in the 1920s due to the severe market crash. However, it stopped doing well after the 1930s. As you can see from the graph, over 70% of the time, the line is below the 0% line, which means buy the dip underperforms dollar cost averaging 70% of the time, despite the god-like timing. What makes the buy the dip strategy even more problematic is that we have so far assumed that you would precisely know when you are at a market bottom. But in reality, there is no single person on this planet who can do that. For example, if you miss the bottom by just two months, the success rate of dollar cost averaging over buy the dip will increase from 70% to 97%. So even if you are somewhat decent at calling bottoms, you would still lose in the long run. If you attempt to build up cash and buy at the next bottom, you will likely be worse off than if you had bought every month. Why? Because while you wait for the next dip, the market is likely to keep rising and leave you behind. Another problem with buying the dip is that you are very unlikely to invest when the market is crashing and everyone is panicking. But which investment strategy should I choose? Should I just invest all my money at once right now, or spread it over one or two years? To find an answer, let's do one more thought experiment. Imagine you have been gifted with $1 million and you need to invest it. You can only undertake one of two possible investment strategies. You must either invest all your cash now, we'll call this option lump sum LS, invest 1% of your cash each year for the next 100 years, and we call this option dollar cost averaging DCA. Which one would you prefer? If you assume that the assets you are investing in will increase in value over time, then it should be clear that buying now will be better than averaging in over 100 years. Waiting a century to get invested will not be kind to your purchasing power. We can take this same logic and generalize it downward to periods much smaller than 100 years. Because if you wouldn't wait 100 years to get invested, then you shouldn't wait 100 months or even 100 weeks either. For example, let's say you have 12 grand and again, you need to invest it in one of those two options above. With lump sum LS, you invest the $12,000, all your funds, in the first month. But your dollar cost averaging DCA, you only invest $1,000 in the first month and hold the remaining $11,000 in cash to be invested in equal sized payments of $1,000 over the next 11 months. Visually, it would look something like this. Now, let's go back to history and run a simulation to find out which one of these investment strategies would perform better over a 24-month period starting from 1960 until 2018. Graphically, it would look like this. When the black chart is below the 0% line, these are periods where dollar

cost averaging under performs the lump sum strategy. And when it is above it, it outperforms. If you notice, most of the time the chart is below the 0% line. Visually, it's pretty clear that lump sum outperforms most of the time. But if you are not yet convinced that lump sum strategy beats the dollar cost averaging, we can extend the time period and run the simulation starting from 1920 until 2018. Visually, it would look like this. And in terms of numbers, lump sum beats dollar cost averaging 68% of the time even in such a long time horizon. What about assets other than stocks? Rather than bury you in chart after chart showing lump sum's superior performance, I can shortly say that results are quite similar to the one we just described above. Even in multiple asset classes, LS outperforms DCA the majority of the time. So, to summarize quickly, number one, as a long-term investor, you are better off if you just start investing right away instead of waiting for the crash to happen. Number two, lump sum is a better investment strategy across different asset classes and the majority of the time. It underperforms when investing right before crashes, but over a long period of time, it recovers. Here's another question you might ask. Were you personally convinced by the author's arguments and would you invest in the stock market right now? Here's my opinion. All the numbers and data made sense, but I was still not sure. I was fully convinced after reading the following reasoning. When you invest in a diversified basket of funds, such as the Vanguard FTSE All-World, which by the way includes over 4,115 companies all over the globe, then you are basically investing in the future of humanity. You're simply saying, I believe after 10 or 20 years, humanity is going to be more developed than today. For example, in the 20th century, humanity faced not just one, but two world wars, a cold war, and multiple market crashes, but despite all that, humanity kept going. I don't know you, but I am still positive about the future of humanity. This was the reason, when combined with all the historical data, I was convinced. This is it for this video. If you would like to see more book summaries, check out the playlist that you see on your screen. Have a nice day.