Should I wait for the market to go down before choosing to invest?

I have cash that has been sitting in a savings account earning nearly 0% interest, but the market is at an all-time high. Should I wait for the inevitable downturn to invest?

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2 days ago
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Your question illustrates the difference between two forms of investing, dollar-cost averaging (DCA) and lump-sum investing (LSI). As outlined in a Vanguard white paper, “On average a LSI approach has outperformed a DCA approach approximately two-thirds of the time, even if results are adjusted for higher volatility of a stock/bond portfolio versus cash investments.” The reason for this is that the longer dollars are invested in the market, the longer they have to compound.

If you are confident in your portfolio allocation, understand your investment time horizon and are seeking the potential for maximum returns then you should put your dollars to work as soon as possible. If you are more concerned with loss avoidance and avoiding feelings of regret, then a DCA approach may be more appropriate. If you choose DCA however, be aware that you are likely reducing your potential future returns for short term piece of mind, which actually is likely not that big a deal.

Also, it is impossible to consistently and perfectly time the market and trying to do so can have severe consequences. The annualized total return of the S&P 500 Index from January 1996 to December 2015 was 8.2%. If you exclude the 10 best performing days, during the entire 20-year period, the annualized return drops to 4.5%. And if you missed the top 40 days, again during a 20-year period, the annualized total return drops to -2.0%! The moral of the story is to determine your risk profile, allocate your investments, and get started.