Should You Wait to Invest For A Crash?

Hey everyone Daniel here from Next level life
so I’ve got a question for you should you wait until the stock market crashes before
investing? Would that actually be better? After all, you’d be buying low. That’s great to do. However, if we look back through history would
it have actually worked? That’s what we’re going to be talking about
today. Today we’re going to be discussing whether
or not you should be waiting for the stock market to crash before investing. Before we get started, be sure to like the
video if you haven’t already. So here’s what we’re going to do to answer
the title question. We’re going to use the S&P 500 to determine
whether or not the stock market has crashed. If at any point, the S&P 500 has fallen more
than 20% below its all-time high we will consider a crash to have occurred and invest whatever
money we have saved up until that point. If the crash persists in the following month
(meaning for back-to-back months the price of the S&P 500 is at least 20% below its all-time
high) then we will invest whatever money we come up with during that second month. This process will continue until the S&P 500
has recovered enough so that its price is no longer at least 20% below its all-time
high. During the months where the stock market is
not more than 20% below its all-time high, we will be keeping our money on the sidelines
awaiting our next opportunity to buy low. We are going to compare this to someone who
regularly invests their money every month, regardless of market conditions. In theory, the benefits to regularly investing
is getting more shares early on. This can be beneficial due to the dividends
you may receive on those shares. You can then reinvest those dividends to buy
more shares and begin your own investing snowball. That’s the theory anyway, but it’ll be interesting
to see how it works in practice. In both scenarios, we’re going to be investing
(or saving) $100 a month. A quarterly dividend will be given out. It’ll have an effective yield of 2% per year. We’ll be using the average ending net worth
to determine if waiting for a crash to invest is advantageous. And we’ll be using every available 10, 20,
30, and 40 year period starting from 1928 to 2018. With that out of the way let’s find our answer. Is it really better to wait for a crash to
invest? In 1928 the S&P 500 was worth $17.66 a share. Little did we know that the worst stock market
collapse in the history of America was just around the corner. John is doing pretty well for himself and
he has $100 per month left over after expenses to invest. However, he’s also very smart. He realizes that it is often better to buy
your investments at a bargain price so that you can later sell them at a premium. He wonders if this line of thinking works
the same in the stock market. Therefore he decides to make an experiment. Instead of investing his $100 a month in the
stock market he will save it in a money market fund where it will earn 2% interest (this
is mainly to keep it consistent with the dividends he would be getting if he were to invest). He will wait for the stock market to crash
before moving all of his savings into investments. He decides that he will not invest any of
his money until the stock market is at least 20% down from its all-time high. In January of 1928, the S&P 500 fell $0.09
to $17.57 a share. By the end of 1928, the price had risen to
what was then an all-time high of $24.35. It would continue to rise all the way to $31.71
a share in August 1929. And that’s when the bottom fell out of the
market. In September the S&P 500 was valued at $30.16
a share. One month later it was down to $24.15. That’s roughly 24% off its all-time high and
John is now able to move his savings into investments. It’s been 22 months since John began saving
for this moment. thanks to his diligence and the interest he
has gained on his money he has $2,235 available to move into the stock market. At about $24 a share, this will buy him almost
93 shares of the S&P 500. In November 1929, one month after John made
his major purchase, stocks still weren’t doing well. In fact, the S&P 500 fell to $20.92 a share. This is approximately 34% under the $31.71
all-time high that the S&P 500 set back in August. Therefore John will invest all of his monthly
savings right away. He will continue investing his entire $100
monthly savings until the S&P 500 has recovered enough that it is no longer at least 20% below
that all-time high. In this particular case, that means John will
continue investing $100 a month into the S&P 500 until July 1952. In July 1952 the S&P 500 had recovered to
$25.40 a share. That’s just barely enough to stop John from
investing. At that point, John will have 2,990 shares
of the S&P 500. His total net worth will be just over $76,000. John has invested $29,400 of his own money
over the course of this example. That’s an effective average rate of return
of about 6.8%. Which doesn’t sound great but keep in mind
that’s 6.8% per year during the worst stock market crash in American history. It’s a great lesson in the power of investing
when the market has crashed. However, that’s not the video we’re here for
today. Today we’re trying to figure out if waiting
to invest until the market crashes is better than just investing regularly. So I pulled up Excel and ran John’s experiment
to see what his ending net worth would have been at the end of every single available
10, 20, 30, and 40 year time spans. On average, under the assumptions we talked
about, John’s ending net worth at the end of every available 10-year time span is about
$17,000. At the end of all 20-year time spans it’s
about $62,000. For 30-year time spans, he ends up netting
around $181,000. And finally, is average ending net worth of
all available 40-year time spans is around $443,000. However, if John had just invested his $100
a month from beginning to end instead of waiting for the market to crash he would have fared
better. His average ending net worth for all 10, 20,
30, and 40 year time spans were $20,000, $73,750, $206,000, and $489,000 respectively. We see a similar pattern play out when looking
at the medians, minimums, and maximums of each scenario. If John had waited for the stock market to
crash before beginning to invest his median ending net worth would be $16,900 for all
10-year scenarios. It would’ve been $54,650 for the 20-year
scenarios. He would’ve amassed $176,000 in all 30-year
scenarios. And he would’ve accumulated about $415,600
in the 40-year scenarios. Had John invested consistently from start
to finish he would’ve improved his fortune by anywhere from nearly 10% to almost 30%! His ending median net worth for all scenarios
would be $19,400, $70,500, $190,400, and over $450,000 respectively. John’s minimum net worth for each time span
was $8,900, $19,200, $65,900, and nearly $215,000 assuming he waited for the market to crash. If he’d just invested consistently from
start to finish he worst-case net worth for each time span would be $8,300, $29,000, $87,100,
and $235,700. John’s maximum net worth for each time span
was $27,000, $134,300, $453,500, and $947,400 assuming he waited for the market to crash. If he’d invested consistently his best-case
net worth for each time span would be $37,600, $177,500, $487,500, and $961,600. You’ll notice we do see the “wait for
the crash” strategy beat out the consistent investing strategy in John’s worst-ever
10-year stretch. However, outside of that one instance, this
contest was very one-sided. I guess that’s where the old saying comes
from… “Time in the market beats timing the market.” But how can that be? Buying low is supposed to be a good thing,
right? Shouldn’t you end up with more money if you’re
only buying when the market is low? Especially considering in this particular
example the dividend that John was getting when he was investing in the market and the
interest that John was getting when he wasn’t investing in the market was 2%. So shouldn’t John’s income have been the same
either way? The answer is sort of but not really because
they’re calculated a little differently. If you have an effective dividend yield of
2% as we did in John’s example that means the dividend per share is going to be 2% of
the share price each year. However, since this stock paid out dividends
once a quarter instead of once a year (which is pretty typical for most stocks) that 2%
would be split into four separate dividend payments. This makes a pretty big difference. Let’s take a look at the example to see how. In March 1928 when the first dividend John
received was declared the price of the S&P 500 was $19.28. Since the total yield for the year was supposed
to be 2% this first quarterly payment should be about 0.5% of that share price. 0.5% of $19.28 is approximately 9.64 cents. At that time, assuming John had been investing
$100 a month consistently, he owned roughly 16.67 shares. 16.67 shares * 9.64 cents per share is about
$1.61 in income for the quarter. That’s roughly $0.54 a month. However, interest on a savings account is
based on how much money you have in that account. For every $100 John has in his savings account
he earns $2 per year in interest. If John saved $100 on the first day of each
month he would earn $0.17 in January, $0.33 in February and $0.50 in March. on average that’s about $0.33 per month in
interest. So you can see how this difference between
the two methods would grow over time.

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