American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Feb. 2001 – Time, Not Timing

Investors often ask us for our view of what the market is going to do. We are tempted to respond that, if we knew, we wouldn’t be showing up to work five days a week. The fact of the matter is, no one knows what the future holds. While some prognosticators gain temporary notoriety for being right, countless studies have shown that they are simply the lucky few, among hundreds of “money managers” (we would say gamblers), taking a guess at any point in time as to what might happen.

Rather than trying to “time” the market, investors should simply save regularly. As economists, we cannot say that future consumption (saving) is better than present consumption (spending today); this is a question of individual preference. But as investment advisors, we can help to quantify the cost of present consumption, by making explicit the sacrifice in terms of foregone savings.

The table below assumes that two individuals, Milton and Maynard, have available $1,000 of discretionary income beginning at age 16. Milton begins saving $1,000 immediately, which grows at 7.5% annually. At the age of 25 he decides to begin enjoying his $1,000 by spending it, though he allows his accumulated savings to grow. Maynard, on the other hand, is a party animal, and spends his $1,000 every year until he reaches age 25, at which point he begins saving the $1,000, which also grows at 7.5% annually.

Not until age 59 does Maynard “catch up” to Milton. By delaying consumption for 9 years initially, Milton enjoys 35 years of consumption (while Maynard has none) without sacrificing any savings relative to Maynard.

Also in This Issue:

The Cost of Mutual Funds
Newly Recommended Funds
Saving for College
Good News on Taxes
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield