hey guys it's Sasha during a market crash like the one we're in right now you will hear a lot of people telling you that you can make a lot of money by perfectly timing the market selling out at exactly the right moment and then buying back in when the stocks have gone down one YouTube after another will be telling you that they know when the bottom is going to be you should not invest because only idiots will invest when the whole Market is going down you are just going to catch a falling knife it is much much much better to wait and then invest at the very bottom and you will make a huge amount of money as a result the big problem with this theory is that it is complete rubbish and unlike the proponents of drawing random lines on charts pretending that those random lines mean anything whatsoever I actually have data that I'm going to share with you numbers do not lie and let me show you why dollar cost averaging through the downturn absolutely destroys timing the market over the long term it is not even close first let's talk about invest thing during an actual market crash I will show you how much money you can lose trying to time the market when the market doesn't end up crashing a little bit later so let's use a popular recent example of the.com bubble let's assume that you are an investor in your 20s or 30s and let's say you started investing a few years ago and you have say twenty thousand dollars in your portfolio and let's say you are financially astute and you are able to put one thousand dollars per month into your investing account every single month this is just an example I know everyone's personal numbers and circumstances are going to be different so let's say you are looking at this person in August 2000 just before the stock market began collapsing and then let's say that that person just goes and puts in there one thousand dollars into the stock market every single month come rain or shine and they just buy the S P 500 because they are boring and ridiculously sensible they invest in September 2000 in October 2000 in November 2000 they don't care of the market is going up going down going sideways whatever they just keep putting money in every single month and let's look at the four-year window through to July 2004 that roughly covers the crash and then the initial bit of the recovery if you kept feeding your money in every single month over that period you would have invested 68 000 during that time frame including the original twenty thousand that you already had and if you were buying the S P 500 Index with your money once a month using the numbers from this chart assuming that the original 20 000 bought at the very Peak you would have 35.5 units off the S P 500 Index at the end these would be worth 60 352 dollars because in July 2004 you were still at a much lower Point than when you started so you would be down seven thousand six hundred dollars on your Investments because of the market crash so about 11 down after the biggest stock market crash in living memory and then let's say that instead of being dumb and just investing every single month you listen to a financial Oracle some kind of God some kind of prophet who knows everything and exactly what's going to happen and they tell you that you should time the market so the markets start falling and in the first couple of months all of these Financial oracles will usually be telling you to buy the dip you know it's just normal fluctuations the market goes up and down you gotta buy the dip look the market dipped in November but then stayed flat in December and then even had a little bounce in January maybe that was just a wobble but then it goes and starts diving down in February and you time it absolutely perfectly and you go and sell as soon as that begins happening going into March 2001 then you weighed out the big drop in the summer of 2001 and then you Wade through and do not invest even during the biggest drop during the summer of 2002 and in the summer of 2003 you're still not quite sure is the market going down even more is there another dead cat bounce happening like the one that we've had in November but by December 2003 the market has gone up again and you decide okay now it is on the way back up you decide to buy back in and you're an investing God because you just bought back in 15 to 20 percent lower than the point at which you sold well if you did that if you took all of the money that you had when you sold plus then added the additional one thousand dollars per month that you would have invested had you been doing it every single month then you used all of that money to buy back in at that point when it begins going back up you would have had 35.1 units of the S P 500 and those units would be worth 59 682 which is about 700 less than if you did the dollar cost averaging but you know what it actually gets massively worse from here because when you sell stock you also have to pay taxes and fees now fees will probably affect most people but let's give you the benefit of the doubt maybe you live in the United States and maybe you use a platform like Robinhood where you're not paying any fees whatsoever so let's just assume here that there are no fees involved by the way if there are fees this problem just gets much worse for anyone trying to time the market but you'll still have to pay taxes so let's assume that you were a great investor before the market crash started and that's twenty thousand dollars that you had in there included let's say 50 in capital gains so six thousand seven hundred dollars out of that twenty would be your capital gains and in most countries you low something like 20 on long-term capital gains so you will have to pay one thousand three hundred thirty three dollars in capital gains tax when you go and sell that position obviously there is no capital gains tax on the one thousand dollars that you invested in the first few months of the crash every single month because the value of that went down so actually when you sold out to time the market you had to pay tax so the total you collected was lower by one thousand three hundred thirty three and I know that there are tax advantaged accounts in some countries that allow you to invest a few hundred dollars a month or whatever it is I'm just using the average across all the different kinds of people in all the different kinds of countries and if you then do the maths Ian you went in time the market really really well if you do have to pay that tax you would only have 34.3 units of the S P 500 which would be worth 58 400 so you would be 3.2 down compared to just dollar cost averaging in now I am sure somebody is going to be really smart and pointing out that because you already paid the capital gains tax you will not have to pay that capital gains tax on those gains in the future so you saved a bit of money there and yeah you know that's kind of true but the amount you saved on not having to pay that tax in the future is actually lower than the amount that you lost in total by trying to time the market in this example you have saved 1 300 ish on tax but lost two thousand dollars on timing the market and the problem is that this tax issue multiplies in a really nasty way if you have to pay capital gains tax every time you do this timing the market you'll be reducing the total pool of capital that you have invested over and over and over and doing that many many times over a long period of time is much much much worse than paying one lot of capital gaze tax at the end in terms of how much net you have left at the end of your investing career when you multiply those reductions down you can easily be losing absolutely giant chunks of your investing portfolio without realizing it but here is the worst bit let's say that you are Nostradamus you are the perfect investing God and instead of the rubbish example that I showed you you time the market to Perfection so you sell in the very first month that the market dips in November 2000 you know right away what's happening you know it's going all the way down by 50 plus percent and you decide to go and sell out and then you wait and you buy back in not at some point you know when the Market's been going up for a while no you buy back in in the first month when the market decides to go back up in May 2003 if you do that using the same exact calculation you will have 39.2 units of the S P 500 which would be worth 66 674 so if you time the market absolutely bang on perfectly like an absolute champ you will be 10 up compared to just dollar cost averaging all the way through ten percent that's it if some of the positions that you sell are sure to time capital gains instead of long-term capital gains because you only bought them within the last 12 months you would have be taxed at about 40 roughly give or take instead of the 20 so that gain will be considerably lower so the maximum gain you could have had in this period over dollar cost averaging if you timed it absolutely brilliantly is 10 and they're much more likely outcome the much more likely outcome given that you probably won't get it absolutely perfectly bang on at the top and the bottom is that you're going to lose a lot of money if you get your timing wrong but not every crash is the.com Crash the 2008 financial crisis was much sharper on the way down and then on the way back up so the chances of you hitting the top and bottom or anywhere close to them in that particular crash we're pretty much zero and if you follow the same exact approach for example back in March 2020 when covet writes and you sold in the first month of the market going down before realizing two months later that you got it horribly wrong you would have lost around twenty percent of your portfolio right there and then just because you are a plonker because you see the market drops by five or ten percent quite frequently and if you go and sell out each time that the market does it you'll be paying out capital gains tax each and every time and most times the market will just go and bounce back up and you'll be left holding your private parts in your hand as you've lost 10 or 20 percent of your total portfolio every single time that the market doesn't end up crashing all the way down that tends to be roughly four to five false drops for every one major crash they all look just as bad as the beginning so if you were to go and try to sell the moment the market starts going down in each one of those and you realize that you screwed up fast you might only lose say 10 each time and if you did that you would be 40 down during those fake crashes before the real one even turns up and when the real market crash does turn up the likelihood is that you will still lose money during that crash versus dollar cost averaging on top of already losing half of your portfolio before you even got there as your portfolio grows over time this problem only gets worse if you sell a large amount relative to how much you're contributing every single month then the capital gains liability on that large amount will be very big compared to your monthly deposits so you will be absolutely killing your portfolio in the process and if you sell out a large amount and the market does not crash and you lose that 10 or 20 of your total because you buy back in after the market bounces back up that will be several years of your investing contributions wiped out in just a month or two so if you are thinking of timing the market you might be able to get it right and maybe you will make a few percent as a result and you will be extremely ecstatic about achieving it but on average over the long term the overwhelming mathematical likelihood is that you are going to lose a huge amount of money instead so just keep that at the Forefront of your mind next time that you're thinking of time in the market or next time you listening to somebody who is telling you that you should absolutely do it if you found this video useful please don't forget to smash the like button for the YouTube algorithm thank you so much for watching I really appreciate that and as always I'll see you guys later.