When markets are volatile, as we’ve seen recently, sometimes investing can feel like a high-stakes gamble—whether triggered by a tech stock plunge or global economic jitters. Many investors hope to time the market for the “perfect” entry point. For example, sell near the top of a market cycle and buy near the bottom. However, prudent investors revile market timing because it is nearly impossible to execute with any precision.
As a fee-only fiduciary financial advisory firm in Birmingham, AL, we’ve seen how timing investment decisions can cost more than market dips ever will.
In today’s blog, we’ll cover:
- What are the risks of waiting to invest?
- How does dollar-cost averaging work?
- How does the power of compounding grow your wealth?
- What are the benefits of long-term investing?
- What are the risks of underperforming inflation by holding cash?
Read our latest Quick Guide: Birmingham Financial Planning: Balancing Markets & Emotions
The High Price of Hesitation in Uncertain Markets
Stock market uncertainty often stops investor decision-making because there are no guaranteed returns. For example, let’s say you have $100,000 to invest but opt to hold off after a 5% S&P 500 drop, waiting for the markets to stabilize. This delay could be costly. Why? A Birmingham CFP® professional would tell you that waiting for the “right” moment often means missing out on growth.
- Historically, the S&P 500 averages 10% annual returns (before inflation).
- The stock market tends to move in short spurts. Missing short rallies undermines long-term performance.
- If you wait a year to invest those assets, you may miss $10,000 in potential gains, as your $100,000 could have grown to $110,000.
- Worse, you’re likely losing to inflation—projected at 2.5% in 2025—which can shrink your cash’s purchasing power to $97,500, a net loss of $12,500 in real terms.
- It is more important to get into the market than when you get in.
The Power of Compounding: Why Starting Early Matters
Compounding is the secret sauce associated with building wealth. Time for compounding returns is your best friend when you invest for long-term growth and income. The earlier you invest, the more time your money has to grow. Using hypothetical case studies, let’s look at two investor scenarios:
- Investor A, who is 30 years old, starts investing $10,000 annually in a diversified portfolio, averaging 7% returns. By age 65, their $350,000 contributions could have grown to $1.2 million.
- Investor B, who is 40, begins investing the same amount annually and earning an average of 7% on those funds. By 65, their $250,000 has grown to $560,000—less than half of Investor A’s total. That 10-year delay costs Investor B roughly $640,000, despite investing $100,000 less.
This shows why starting early and being consistent matters more than timing the “perfect” entry point. As the old saying goes, “It’s never too early to start saving for retirement.”
Long-Term Investing: Smoothing Out Market Fluctuations
Short-term market fluctuations can be unsettling, in particular, if your investment strategy is influenced by what you read in the media.
For example, a 10% decline in the market may cause you to rethink your current investment strategy even though the damage has already been done. Selling near the bottom is a way to realize the loss, and the money will no longer be in the market when it recovers. However, staying focused on a long-term investment strategy can minimize the impact of these swings.
While the S&P 500’s annual returns vary widely (e.g., -37% in 2008, +31% in 2019), the average 10-year annualized return from 1926 to 2023 is 10.3%, with less variability; long-term negative returns have been infrequent and overshadowed by rising markets – in particular since 2009.
Say you’re a 45-year-old business owner with $500,000 to invest. If you were to invest in a diversified portfolio for 20 years, it’s possible that your assets could grow to $1.93 million at a 7% average return despite periods of short-term volatility. If you waited five years for a “better” market, you would need to invest $672,000 to reach the same asset amount.
Watch our video on innovative tax-smart investing strategies.
Dollar-Cost Averaging Strategies
If market uncertainty makes you nervous, consider dollar-cost averaging (DCA) as a lower-stress way to start investing. Dollar-cost averaging (DCA) is a strategy where you invest a fixed amount of money on a regular basis, regardless of market conditions, to reduce the impact of volatility. Buying in down markets makes sense because you get more shares for your money.
For example, let’s say you have $60,000 you want to invest in 2025. Instead of investing the lump sum, you opt for DCA, contributing $5,000 monthly to an S&P 500 Exchange Traded Fund over 12 months:
- In January, the ETF price is $100, so you buy 50 shares
- By March, the price dropped to $80 during a market dip—so you get 62 shares instead of 50
- Then the price rises to $120 in July, and your $5,000 buys you 42 shares.
You bought 625 shares at an average price of $96 over the year. Despite market fluctuations, DCA smoothed the entry cost, reducing the risk of buying based on intuition.
If the ETF ends up worth $110 by December, your portfolio is worth $68,750, a $8,750 gain.
This is one of the best ways to benefit from a down market – you get more shares. This strategy is similar to buying on the dips.
Losing to Inflation: The Risk of Staying in Cash
Holding cash equivalents (money market funds, CDs, T-Bills) may cause you to feel safer because it does not decline in value like the stock market. However, it has a different risk that impacts your assets’ purchasing power. This risk is triggered by inflation.
For example, in 2025, high-yield savings accounts offer around 4% APY, but with inflation at 2.5%, your real return is just 1.5%. In a worst-case scenario, inflation is more than 5%, and your rate of return is less than 5%. Your purchasing power declines by the difference every year inflation exceeds your rate of return.
For illustration purposes, if you took $200,000 out of the stock market and put it into a savings account at 2.5%, that’s a gross return of $5,000.
Meanwhile, inflation is eroding the purchasing power of your money by 5%. So it takes increasing money to maintain your current lifestyle and protect your financial security later in life.
Compare that to investing in a diversified portfolio averaging 7% returns: $200,000 grows to $394,000 in 10 years, a real gain of $146,000 after inflation. The difference, $194,000, highlights the hidden cost of being too conservative.
FAQs About Investing and Market Timing
Here are some frequent questions our Birmingham financial advisors receive every time the stock market takes a sudden dip in value:
What Are the Risks of Waiting to Invest?
- Waiting can lead to missed investment opportunities. The old saying goes: “There is no bell signaling the bottom or top of a market.” It’s more important to get in than when you get in.
How Does Dollar-Cost Averaging Work?
- DCA involves investing a fixed amount regularly and averaging your entry price to reduce the impact of market volatility.
Why Is Time in the Market Better Than Timing the Market?
- Long-term investing leverages compounding and smooths out short-term fluctuations, historically delivering higher returns.
Start Investing with BCR Wealth Strategies Today
The hidden costs of waiting to invest—missed compounding, inflation losses, and opportunity costs—far outweigh the risks of market volatility. Decades of data show that time in the market consistently beats timing the market.
At BCR Wealth Strategies, our Birmingham CFP® professionals can help you overcome hesitation with personalized financial planning solutions.
Whether through dollar-cost averaging or long-term strategies, we’re here to guide you. Contact us to schedule an introductory call.
