Why Smart Investors Know Time Is of the Essence

It's often said that timing is everything in life. But when it comes to investing, time works both for you and against you. 

For new investors, it may seem like a good idea to wait until market conditions are "right" before sinking money into stocks, bonds, or other assets, but even market professionals find that a tough call to make. A better strategy may be to get started now while time can be your friend. Even investors with "bad" timing earned twice as much as people who held their savings in cash-like investments over a 20-year period.

The hypothetical image below shows average ending wealth for four scenarios over a 20-year period through 2023. Treasury bills were used in the cash investment example. In the examples where waiting to invest was a factor, the yearly $2,000 investments were placed in Treasury bills while waiting to invest in stocks. Stocks are represented by the S&P 500^® index with all dividends invested. 

As you can see, there's no magic formula. Attaining your financial goals takes time, discipline, and a sound investing strategy. Starting earlier, rather than later, can allow you to benefit longer from compounding returns, and staying the course and continuing to invest, regardless of market conditions, can lead to greater wealth accumulation. 

Even if you don't invest in all the right things at the right time, you'll generally be more successful on the field than on the sidelines. It's also important to define and understand a few investing principles, including asset allocation, diversification, and portfolio diversification. 

Asset allocation takes a portfolio "pie" and dedicates slices of varying sizes to different asset classes—equities, bonds, and cash, for example—based on an investor's risk tolerance and short- and long-term financial goals. Stocks tend to be riskier than some other asset classes but have historically performed well over long periods of time.

For example, based on the "60/40" rule, investors would devote 60% of their portfolio to stocks and 40% to bonds. The 60/40 rule traces back to the Modern Portfolio Theory, developed in the 1950s by Nobel Prize-winning economist Harry Markowitz, which has long been viewed as a cornerstone of portfolio diversification. 

A 60/40-based strategy would allocate 60% of a portfolio's holdings to stocks and 40% to bonds. Such an allocation has generated "an attractive risk-adjusted total return over time compared to all-stock or all-bond portfolios," according to Omar Aguilar, Chief Executive Officer and Chief Investment Officer of Schwab Asset Management.

From 1976 through 2023, a 60/40 balanced portfolio generated an average total return of 8.1% compared to 9% for the S&P 500 index and 6.6% for the Bloomberg U.S. Aggregate Bond Index, according to Schwab Asset Management.

According to the American Association of Individual Investors, a 60/40 allocation is considered a "moderate" risk/reward strategy. A more "conservative" allocation might flip that ratio to 40/60 (40% stocks, 60% bonds), while a more "aggressive" investor might go with 70/30 (70% stocks, 30% bonds).

Generally speaking, investors who've had a long time—decades perhaps—to save and are willing to weather the ups and downs of the stock market have seen stronger performance (but they can also be subject to bigger, shorter-term losses). Someone with less time to save and a lower risk tolerance could see smaller potential gains but also smaller potential losses. 

Very few investors have been successful "timing the market"—buying and selling based on perceived market tops or bottoms. The prudent path for some investors is to focus more on asset allocation, which has evolved over the years. Investors now have greater access to more "niche" asset classes, such as commodities and Real Estate Investment Trusts (REITs). That means in a moderate portfolio, investments are spread across equities, bonds, and commodities of varying sizes and types.¹

The beauty of diversification is that it can help you manage the optimal mix/balance of risk and return for you specific circumstances.

Through portfolio diversification, an investor aims for an optimal mix of risk and return. The three traditional primary asset classes—stocks, bonds, and cash—tend to fare differently in various markets and economic environments. For instance, stocks often perform well when economic growth is strong, while bonds may outperform when growth slows. 

By investing in all three basic asset classes—as well as commodities and possibly other investments—investors can minimize dependence on any single asset class and potentially maximize value. Diversification can go even further. But keep in mind diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Finding the right balance can be challenging, but there's help available, such as working with an investment adviser. And if you'd rather let someone else do most of the driving, consider learning about automated investment advisory services. 

You may believe you've figured out the best asset allocation for your risk tolerance. But that doesn't mean you can turn on autopilot. Markets change, so it's important to regularly check your portfolio to make sure any one investment isn't taking up too much or too little of the overall pie. 

Portfolio rebalancing entails buying or selling certain investments to restore your portfolio back to its target allocation. For example, you started with a 50/50 balance of equities and bonds, but after a recent stock market rally, equities now account for 70% of your portfolio's value. To restore your target mix, you may need to sell some stocks and/or buy more of something else like bonds.

Rebalancing can get tricky due to a variety of factors. There may be tax implications, and transaction costs should also be considered.

A key question for investors: How much are you paying in fees?

Most fees fall into four main categories: commissions, fund fees, advisory fees, and account fees. If you trade individual stocks or ETFs, you may be charged commissions each time you buy or sell securities. If you invest in a mutual fund or ETF, you'll pay an operating expense or a recurring annual fee to cover the fund's management, trading, and operational expenses. For managed funds, most advisors charge a fee, either a fixed amount or a percentage of total assets, to build and oversee your portfolio. 

Fees can vary widely within each category. For example, actively managed funds typically charge more than passively managed funds that track the S&P 500 or other index simply because of the greater work involved. Funds that invest in smaller, more niche or global investments may charge more for the same reason. As long as you're comparing apples to apples, it's worth shopping around to make sure you're not paying excessively high fees for the same market exposure and performance potential.

While fees may appear small at the outset, even 1.2% in fees, for example, can reduce earnings over time. 

The image below shows two hypothetical investment products in managed portfolios with equal total returns but different cost structures. In this example, an investor has $100,000 invested in each of two diversified portfolios. Portfolio A charges 1.2% in fees, and Portfolio B charges 0.25% in fees. Assuming a 6% annual rate of return over a 30-year period, Portfolio B would earn about $130,000 more than Portfolio A. 

Mapping out and executing an investing strategy can be time consuming and complex, but technology can help simplify.

If an investor holds multiple accounts across different advisors and funds, it may be difficult to get a clear, wholistic picture of their total portfolio. This could impede them from taking advantage of tax-efficient investing strategies or effective retirement income planning. Combining accounts with the same objective could make it easier to keep track of your investments.

Setting up automatic contributions into your investment accounts can also make it easier to stick to your plan. And making fixed regular purchases over a long period of time—a strategy known as dollar-cost averaging—enables you buy more shares when prices are down, and fewer shares when prices are up. But keep in mind, periodic investment plans (dollar-cost averaging) do not assure a profit and do not protect against loss in declining markets.

Investors could also consider an automated investment advisory service to do the work for them. This service combines a sophisticated algorithm with a dedicated team of experienced analysts to produce diversified portfolios that can help investors pursue their financial goals.

Losses are never pleasant, but there can be a silver lining: tax savings through tax-loss harvesting.

Selling securities at a loss in order to offset capital gains can be a smart strategy. When you sell a security for more than you originally paid for it, the profit is a capital gain. It's taxable if it occurs in a taxable account—not a 401(k) or IRA, for instance, which are tax-deferred accounts. Once you've "harvested" your losses, you'll need to replace those assets to keep your portfolio allocation on target.

In the 2023 tax year, short-term capital gains (those on investments held for a year or less) were taxed at your ordinary income tax rate, while long-term capital gains, or investments held for longer than a year, were taxed at either 15% or 20%, depending on your income level. For the 2024 tax year, long-term rates are 0%, 15%, or 20%, also depending on your income level. 

A security sold for less than you paid for it generates a capital loss. If this occurs in a taxable account, you can use the loss on your tax return to offset realized capital gains by deferring current tax liabilities. 

In addition, you can offset up to $3,000 in ordinary income to the extent total losses exceed total gains. If there are still losses left after all that, they can be used to offset gains and income in future tax years. 

Learn more about how tax-loss harvesting works, including the potential pitfalls surrounding the wash sale rule, which disallows losses if you repurchase the same or a substantially identical security within 30 days.