How important is timing entry into the market when investing your money?

It’s a great feeling to have some money set aside to invest. Whether saving for a vacation or for retirement, you are one step closer to reaching your financial ambitions. Did you know that when you make your investments can make a big difference to their growth?

This article looks at three ways to approach the timing of investments to your portfolio:

1. Lump-sum investing. This involves investing a lump sum of money all at once.
2. Market timing. Investors try to predict when they can buy units at the best price. This, they hope, will produce the best possible return.
3. Dollar-cost averaging. It’s the practice of investing a consistent dollar amount into a given investment on a regular basis.

Let’s take a closer look at each approach using illustrative scenarios. In each example, the individual invested the same amount of money into the same fund. Their goal is to buy as many fund units as possible at the best possible price.

Lump-sum investing scenario

Naomi decides to invest her $2,600 tax refund all at once immediately. By doing so, she thinks it will start to grow her portfolio as soon as possible. She acquires 45 units of ABC mutual fund (ABC) at $57.78 per unit.

Market timing scenario

Guillermo tries to predict when his chosen funds are at their lowest, to maximize his return. He aims to time his entry to the market on a dip. His goal is to buy shares at the lowest cost so he can hold more units. Guillermo invests $2,600. This enables him to purchase 60 units of ABC at $43.33 per unit. 

Dollar-cost averaging scenario

Gabriel opts for a dollar-cost averaging approach. He invests a total of $2,600 in his registered retirement savings plan (RRSP) but divided it into $100 every two weeks when his employer pays him. With the first deposit, he buys two units of ABC. Two weeks later, the stock market falls and so does the unit price of ABC. This time, his $100 deposit allows him to purchase 2.5 units of ABC. With market fluctuations and consistent investments over a longer time period, the $2,600 in total that he invests allows him to buy 65 fund units in one year, at an average cost of $40 per unit.

Consistent investing usually beats trying to time the market

It’s tempting to believe that timing the market is the best way to invest your money. In hindsight, it looks easy. But this technique comes with a big risk, namely missing out on the best days of the market. It can also be time-consuming and stressful to research and take the time to plan that investment.

Based on market index data, we know that a $10,000 investment made 20 years ago could now be worth over $60,000, but only if you stayed invested in the market.¹ Missing the 10 best days in the market during those 20 years would have reduced it to around $30,000.¹

Missing the best days can hurt

Growth of $10,000 in the S&P 500 Index, 20 years ending 12/31/24

For illustrative purposes only. Returns have been rounded to the nearest whole number for simplicity. Past performance is no guarantee of future results. It is not possible to invest in an index. Actual returns would be different due to fees and expenses associated with investing which are not applicable to an index. Source: FactSet and S&P US. Daily data as of December 31, 2004 through December 31, 2024. Analysis ranks all daily returns for the index and assumes that investors that are not fully invested on the best days miss out on those returns. If index return the following day does not fall into a range that meets the definition of best days, then the growth of the hypothetical investment resumes.