Timing really is crucial

There are enough investing philosophies out there to make your head spin. Buy and hold. Ride the commodity wave. Value investing. Technical analysis.

Each has its own merits, but sometimes you just need to look at the numbers to make sense of it all.

Ed Easterling, who runs an investment management and research firm in Corvallis, Ore., did just that, and he illustrated his findings in a graphic that The New York Times has published.

As the Times describes it, in 2001 a client asked Mr. Easterling what kind of return investors should expect over the long term. Instead of rushing his response, Mr. Easterling did some research and found that the answer, as it is with so many things related to finance, is that it depends. What exactly does it depend on? Timing.

Mr. Easterling tracked the S&P 500 average real return -- that is, the return that accounts for dividends, average taxes, fees and is adjusted for inflation -- from 1920 on. His analysis determined an investor's average annual return depending on what year he or she entered and exited the market.

For instance, if money was invested in 1994 and held to 1996, the average annual real return was about 7 per cent. But if the investor got greedy and kept the money in there until 2002, the annual return over that period fell sharply.

The analysis also determined that the best 20-year period to invest in ran from 1948 to 1968, when the average annual real return hit 8.4 per cent. The worst 20 years ran from 1961 to 1981, when the average annual real return was negative 2 per cent a year.

The graphic might take few minutes to figure out, but it’s worth the time.