Key takeaways
- Time in the market typically beats timing the market
- Invest as early and often as possible to take advantage of compound growth over long periods
- Delaying saving presents significant opportunity costs
- Match your asset allocation to your priorities and time horizon
In the complex world of investing, a guiding principle holds true:
“Time in the market almost always beats timing the market.”
This saying is widely endorsed by financial experts who caution against the elusive quest for the perfect market entry point.
In reality, no one has a crystal ball predicting market trajectories with certainty, despite bold claims to the contrary. This principle gains even more significance when applied to long-term investments, such as retirement savings. The best thing we can do is take advantage of our ability to build a dynamic plan, and rely on the methods that are time-tested to work well. A major one being to invest money as early and often as you can.
The earlier you invest—and the longer you’re in the market—the better off you will likely be. This approach forms the cornerstone of a sound investment strategy, affirming that consistent market engagement, rather than speculative timing, is the more reliable path to financial growth. It’s also the reason it is important to build your dynamic plan with your priorities in mind, whether that's retirement by a certain age, or something else important to you.
Types of IRAs and contributions limits
Traditional and Roth IRAs are both types of Individual Retirement Accounts (IRAs) that have the same contribution limits but differ in tax treatment.
In 2024, the IRA contribution limit for anyone under 50 is $7,000. The catch-up provision for people over 50 years is $1,000 for a total 2024 contribution limit of $8,000.
Traditional IRAs are funded with pre-tax dollars, allowing for a potential tax deduction. On the other hand, Roth IRA contributions are made with after-tax money, making retirement distributions tax-free.
Related: Backdoor Roth IRA: What it is and how to do it
The price of waiting vs. the reward for starting early
Many people delay saving for retirement, especially when they’re young and have limited income. Because their goal is so far off into the future, there’s a lack of urgency to start. However, delaying investing is one of the most common mistakes people make. By working with a financial planner, saving for retirement in this way becomes much less daunting, because it can be broken down into smaller steps.
The math is simple: The sooner you start, the more time your money has to grow. This is because of something called compound interest or “interest on interest.” Compound interest is when your investment and accumulated interest generate even more interest. Each time you earn interest, it adds to your account and becomes part of the principal.
Compound interest is the primary reason why time in the market is so essential. The reason is because money doesn’t grow linearly. By reinvesting your earnings back into the market, your money grows faster.
To illustrate this point, let’s look at three scenarios using historical performance data from the S&P 500, representing roughly 80% of the US equity market capitalization.
In every example, assume a thirty-year investment period, maxing out your IRA to the respective IRS limit each year.
Source: Congressional Research Service & the Internal Revenue Service via Investopedia
In the chart below, the blue bar represents the market performance of an investor maxing out their IRA(s) in January of every year. The green bar represents an investor who contributed the maximum amount evenly every month throughout the year. Lastly, the gray bar shows the performance of an investor maxing out their IRA(s) in December.
Source: Congressional Research Service & the Internal Revenue Service via Investopedia
As you can see, the person who went “all-in” in January made over $20,000 more than the monthly investor and $40,000+ more than the December investor.
Opportunity cost and proper asset allocation
Losing money isn’t the only way an investment can cost you; not planning to invest early can often be just as damaging to your long-term investment returns. Missing out on the opportunity to make money is sometimes called “opportunity cost.” One way to think about opportunity cost is the money you would have made if your portfolio had been optimized. Not participating in the market’s upside can have the same costs as suffering market downside.
Fortunately as part of your Facet membership, we’ll ensure your portfolio is optimized based on your priorities, so you don’t have to worry about whether or not your money is working as well as it could be.
Ultimately, your money grows by being in the market. The more time your money stays in the market, the better your chances of accomplishing your goals. By investing early in the year, you are effectively extending your time in the market, and increasing your potential chance of success.
Proper asset allocation is key to sustainable growth
A similar concept applies to other decisions. For example, if you don’t have a financial planner, it is difficult to know whether your portfolio’s allocation is aligned with your time horizon and objectives. If those factors aren’t where they should be, it’s much more difficult to know how effective your strategy is.
This is why we put so much emphasis on working with members throughout their planning journey, adjusting their planning strategy as life changes. An investor with a longer time horizon should probably have more money in stocks where the return potential is higher. An investor with a shorter horizon should focus a bit more on downside protection.
If you carefully plan to get this balance right, you increase the chances of achieving your goals. It becomes much more challenging if you don’t get it right or worse if you needlessly tinker with your allocation.
Final word
Time in the market beats timing the market. Instead of trying to predict market fluctuations, focus on consistently investing and staying in for the long haul. Additionally, ensure that you’re investing with a purpose. Planning for the future and setting investment goals simplifies decision-making.
Maxing out your IRAs at the beginning of the year is a sound investment strategy, and for most people, it fits solidly into how they are planning for their future. It allows you to take advantage of compound interest and more time in the market, leading potentially to greater growth opportunities.
As far as ensuring sustainable growth through proper asset allocation, relying on your dynamic and ongoing planning strategy is critical. Your team of experts at Facet will make changes for you to keep your investment strategy on track, and keep you focused on achieving your priorities.
