When it comes to your money, the biggest mistake you can make is trying to “wait until the right time.”
The biggest mistake investors make is waiting for the perfect time to invest—whether it’s buying a house or investing in the stock market, time is of the essence. Waiting for the ideal market cycle could be a costly financial mistake. You exist in the market that is; hoping, wishing, and waiting for something different is just market timing—and that is a fool’s errand.
Waiting to buy the house.
With mortgage rates around 6-7%, many would-be home buyers are deciding to wait until interest rates go down. After all, at one point they were 2-3%, which makes buying the house you want a lot easier—so delaying until a more affordable rate exists seems wise.
Limited Purchasing Power
The difference in mortgage rates will have a real impact on your monthly housing costs and will certainly impact the price of the home you can afford to purchase. For example, if you have a 30-year fixed mortgage for $400,000 at 3%, your monthly cost is about $1,700/month. If you increase the rate to 7% it is going to cost you about $2,700/month—a $1,000/month increase. Over the lifetime of the mortgage that’s about $350,000 in additional cost.
But remember, investing is a long-term pursuit, and if you are going to consider the long-term “cost” to you of a higher interest mortgage, you also should consider the loss of benefit by delaying.
What is the benefit of owning a home for 30 years? If you buy a $500,000 home, and it increases in value at 4.3%1 over that same 30 years you pay your mortgage, it will be worth approximately $1.7M. This is over a $1M in investment growth that you may miss out on or delay because you are waiting for the ideal interest rate environment.
Setting aside the numbers (which, of course are the most important part of evaluating your financial choices), who is to say the rates will go down anytime soon? Maybe they will, maybe they won’t, but you still should buy a home for investment and lifestyle reasons. Thirty years is a long time, would it not be better to start chipping away at the debt and living your life instead of delaying however long until the perfect market conditions arise? This does not even take into account the use and enjoyment one receives in home ownership, and the potential opportunities to refinance if and when the rates to go down.
The realities of the rates may make it impossible to purchase the home you truly desire. You may have to reduce your expectations, but I encourage you to do exactly this. If you do not own a residence and can purchase one that is feasible for you and your family—even if it is not your dream home, do it. It can be a starter home—that grows in value while you wait for interest rates to decrease and save more for your dream home.
Waiting to invest in the market.
Many people look at market all-time highs and decide they will hold onto their cash and wait until there is a “dip.” Just like home buyers, these investors want to wait until the perfect environment to invest—they want to skip the hard part of the process, and just go in at the bottom and only receive the growth. And just like with real estate, success in the stock market requires time, it does not require—and in fact it punishes market timing.
Buying at an all-time high.
Imagine putting a bunch of your money in the market at record highs only to have it drop 30% in the next week or month. This is exactly what cash-hording, delaying investors are fearing—and it makes perfect sense emotionally. However, investing successfully is not an emotional process; it is a “numbers over time” strategy. Worrying about market losses distracts you from the most important part of investing—capturing the market gains.
One study looked at the cost of a hypothetical investor missing the 10, 20, and 30 best-performing days in the market. The study covered the period between Jan. 1, 2009 to Dec. 31, 2018.
In the study, the hypothetical investor invested $1,000 in the S&P 500 index at the start of the period. The results are eye-opening:
- If the investor left the money invested for the entire period, their initial $1,000 investment would have grown to a value of $2,775.
- If the investor had missed the 10 best days of the 10-year period, their initial investment would increase to $1,722 at the end of the 10-year period. This is only 62% of what their investment would have been valued at if they had not missed these 10 best days.
- If the investor had missed the 20 best days of the 10-year period, their initial investment would increase to $1,228 at the end of the 10-year period. This is only 44% of what their investment would have been valued at if they had not missed these 20 best days.
- If the investor had missed only 30 best days of the 10-year period, their initial investment would decrease to $918 at the end of the 10-year period. This represents a decline of 8% in the value of their initial investment after missing the 30 best days of this 10-year period.2
It is time in the market, not timing the market that matters most.
Waiting to start anything in life worth doing.
Waiting until the “perfect moment” or “right time” is a theme in our culture for more than just our finances. Many people decide to wait to get married, start a family, start their business, or do any number of things that they desire to do but only under the right set of circumstances.
Sure, you have to wait to do things until they are feasible, but waiting until the “right time” is more often a means of delaying something you allegedly want to do, and in the case of investing, it may even negatively impact your outcomes. My advice: if you want to build your wealth, start now, in the financial environment you are in, and do not delay until it’s the “right” time.
Since 1991: The average annual home price increase has been approximately 4.3%. What Is the Average Home Value Increase Per Year? | Credit Karma
Why Time in the Market Is More Important Than Timing the Market | FinanceBuzz