Imagine if you managed to find the worst possible fund manager to manager your money. I started working in markets in the late 1980's - shortly after the 1987 crash. If over that time I had sought out and found the worst possible manager (PS - it isn't Pathfinder) for my retirement savings what sort of job would he or she have done?

Let's assume that I occasionally had lump sums of NZ$10,000 to invest. And lets also assume that I only invest in the S&P500 (currency un-hedged from a NZ perspective but with dividends reinvested) and lets also assume that between me and the fund manager, we only invest my $10,000 lump sums just before market crashes. In fact, we are so bad that we choose to invest on the exact day that the market tops out before a 30, 40% or even 60% fall.

So in NZ terms we had market peaks at 13 August 1987, 2 November 2000, 29 March 2006. The peak to trough fall (in NZD terms) after each of these peaks was:

13 August 1987 -40%

2 November 2000 -59%

29 March 2006 -33%

So over 28 years, we have invested a total of NZ$30,000. As of 15 September, that is now worth NZ$125,665. The total rate of return over that period is 7.5% which is not too far away from the old 8% per annum rule of thumb. (Inflation over the same period was 2.6% p.a. giving us a real return of 4.9%). And bear in mind this strategy is a totally naive, invest at the worst times, don't manage the currency risk, completely passive style of management. Imagine the improvement by choosing a manager who can do even sightly better in terms of managing market and currency risk. Imagine if you could avoid even just 1/3 of those big draw-downs, imagine if you could be even just partially hedged during the big run-ups in the NZD?

I take four points out of this simple analysis.

- Time in the market is IMPORTANT
- All of the time is the best time to invest
- Adding even a little bit of manager skill (currency management, downside risk mitigation) will make a good story even better
- Instead of just three lump sums, imagine how powerful a continuous approach (i.e., dollar cost averaging) would be?

The chart below shows the S&P total return index, in NZD terms. The orange arrows indicate the timing of our 3 "bad"investments, the orange line shows US CPI growth.:

Plagiarism Alert: This post is based on a similar exercise by Ben Carlson, as seen on www.cnbc.com