Investing in low cost index fund — does the timing matter?
If you're worried about investing all at once, you can deploy your starting chunk of cash gradually by investing a bit of it each month, quarter, etc. (dollar-cost averaging).  The financial merits and demerits of this have been debated, but it is unlikely to lose you a lot of money, and if it has the psychological benefit of inducing you to invest, it can be worth it even if it results in slightly less-than-optimal gains. More generally, you are right with what you say at the end of your question: in the long run, when you start won't matter, as long as you continue to invest regularly.  The Boglehead-style index-fund-based theory is basically that, yes, you might save money by investing at certain times, but in practice it's almost impossible to know when those times are, so the better choice is to just keep investing no matter what.  If you do this, you will eventually invest at high and low points, so the ups and downs will be moderated. Also, note that from this perspective, your example of investing in 2007 is incorrect.  It's true that a person who put money in 2007, and then sat back and did nothing, would have barely broken even by now.  But a person who started to invest in 2007, and continued to invest throughout the economic downturn, would in fact reap substantial rewards due to continued investing throughout the post-2007 lows.  (Happily, I speak from experience on this point!) Yes timing does matter. Using a simple Rate of Change indicator over the past 100 days and smoothed out with a 50 day Moving Average, I have plotted the S&P 500 since the start of 2007.  The idea is to buy when the ROC indicator crosses above the zero line and sell when the ROC indicator crosses below the zero line. I have compared the results below of timing the markets from the start of 2007 to dollar cost averaging starting from the start of 2007 and investing every 6 months. $80k is invested in both cases.  For the timing the market option $80k was invested at the start of 2007, then the total figure was sold out when a sell signal was given, then the total amount reinvested when a new buy signal was given. For the DCA option $5000 was invested every 6 months starting from the start of 2007 until the last investment at the start of July 2014. The results are below:  Timing the markets results in more than double the returns (not including dividends and brokerage). Edit It has been brought up that I haven't considered tax in my Timing the Market option. So I have updated my timing the market spread-sheet to take into account both long-term and short-term CGT in the USA for someone on the highest tax bracket. The results are below:  The result is still almost a 2x higher returns for the timing the markets option.  Also note that even with the DCA option you will have to sell one day and pay CGT on any profits there. However, the real danger with the DCA option is if you need to sell during a market downturn and not make any profits at all. When you start investing makes a very large difference to the outcome, but that is on the time scale of what generation you were born into, not what week you choose to open your 401(k).  As you note in your last sentence, there is nothing that you can do about this, so there is no point in worrying about it. If you could successfully market time successfully, then that would make a difference even at smaller time scales.  But you probably can't, so there is no point in worrying about that either. As BrenBarn points out, your statement about not regaining their net worth until 2013 applies to someone who invested a lump sum at the 2007 peak, not to someone who invested continuously throughout.   By my calculation, if you started continuously investing in a broad market index at the peak (around Jun 4, 2007), you would have recovered your net worth (relative to investing in a safe instrument that merely kept up with inflation, a hard thing to find these days) around April 12, 2010.  I've done the computation on each business day because that is easier, so it might be slightly worse if do the periodic investment on each payday which is much more realist for a 401(k). (And of course if you need to preserve/recover you net worth in 3 years, you shouldn't be in stocks in the first place) A much less verbose answer is.  Don't worry about buying low.  You have a whole lifetime to dollar cost average your retirement dollars.
"Kind of matters because your definition of ""cost"" is solely based on a hindsight view of market movement.  Lack of gain is not cost except from an inflationary perspective, versus actual value loss of entering near a top.  On a long time scale, yes, the market will probably go up and value will return - but telling someone that now is the perfect time to enter is entirely debatable. Momentum is not fundamental and could reverse tomorrow for all you know." The mutual fund will price at day's end, while the ETF trades during the day, like a stock. If you decide at 10am, that some event will occur during the day that will send the market up, the ETF is preferable. Aside from that, the expenses are identical, a low .14%. No real difference especially in a Roth. "Beatrice does a good job of summarizing things.  Tracking the index yourself is expensive (transaction costs) and tedious (number of transactions, keeping up with the changes, etc.)  One of the points of using an index fund is to reduce your workload.  Diversification is another point, though that depends on the indexes that you decide to use.  That said, even with a relatively narrow index you diversify in that segment of the market. A point I'd like to add is that the management which occurs for an index fund is not exactly ""active.""  The decisions on which stocks to select are already made by the maintainers of the index.  Thus, the only management that has to occur involves the trades required to mimic the index." This is the chart going back to the first full year of this fund.  To answer your question - yes, a low cost ETF or Mutual fund is fine. Why not go right to an S&P index? VOO has a .05% expense. Why attracted you to a choice that lagged the S&P by $18,000 over this 21 year period?  (And yes, past performance, yada, yada, but that warning is appropriate for the opposite example. When you show a fund that beat the S&P short term, say 5 years, its run may be over. But this fund lagged the S&P by a significant margin over 2 decades, what makes you think this will change? The question is valid, you just need to work backwards. After how much money-time will the lower expense offset the one time fee?  Lower expenses will win given the right sum of money and right duration for the investment. What you choose to invest in depends largely on your own goals and time horizon.  You state that your time horizon is a few decades. Most studies have shown that the equity market as a whole has outperformed most other asset types (except perhaps property in some cases) over the long term.  The reason that time horizon is important is that equities are quite volatile. Who knows whether your value will halve in the next year? But we hope that over the longer term, things come out in the wash, and tomorrow's market crash will recover, etc.  However, you must realize that if your goals change, and you suddenly need your money after 2 years, it might be worth less in two years than you expect. When you are putting your money in an index fund, you are not betting your performance against other asset classes but rather against competing investments withing the SAME asset class. The index fund always wins due to two factors: diversity, and lower cost.  The lower cost attribute is essentially where you get your performance edge over the longer run. That is why if you look at the universe of mutual funds (where you get your diversification), very few will have beaten the index, assuming they have survived. -Ralph Winters The Vanguard Emerging Market Bond Index has a SEC yield of 4.62%, an expense ratio of 0.34%, a purchase fee of 0.75%, and an average duration of 6.7 years.  The Vanguard Emerging Market Bond Index only invests in US Dollar denominated securities, so it is not exposed to currency risk.  The US Intermediate Term Bond Index Fund has a SEC yield of 2.59%, an expense ratio of 0.1% and an average duration of 6.5 years.  So after expenses, the emerging market bond fund gives you 1.04% of extra yield (more in subsequent years as the purchase fee is only paid once).   Here are the results of a study by Vanguard: Based on our findings, we believe that most investors should consider   adding [currency risked] hedged foreign bonds to their existing diversified portfolios. I think a globally diversified bond portfolio results in a portfolio that's more diversified. This is largely dependent on your overall investment goals. GIC's provide protection of the invested capital and a guaranteed return at the end of the term. However, in real terms, 1.4% over 18 months results in a loss of capital in real terms. This is because inflation in Canada is just about at or higher than 1.4% per year. In other words, at best, you are equalling inflation and gaining nothing in those 18 months. If their typical rate is 1.2% over 12 months, you are only gaining an additional 0.2% for the additional 6 months. You know as well as I do, 0.2% for 6 months is abysmal. If you have no use for the money in the medium to long term, you should look in to an index fund that is balanced, and diversified and more likely to get you a higher real return over the time period of a few years. Look in to: If you want to preserve the capital over the short term because you might need it after the 18 months period, the GIC is the safer and recommended option. Also, when they mean SP500 fund - it means that fund which invests in the top 500 companies in the SP Index, is my understanding correct? Yes that is right. In reality they may not be able to invest in all 500 companies in same proportion, but is reflective of the composition. I wanted to know whether India also has a company similar to Vanguard which offers low cost index funds. Almost all mutual fund companies offer a NIFTY index fund, both as mutual fund as well as ETF. You can search for index fund and see the total assets to find out which is bigger compared to others. Timing the market and by extension the efficient market hypothesis is one of the most hotly debated subjects in finance academia. If you are to believe the majority of finance professors and PHD's out there chances of timing a market like the NYSE, NASDAQ or LSE is not possible. If you are to take into account the huge amount of hedge funds and money managers who make it their job to prove the efficient market hypothesis wrong then you may have a chance. My opinion is that the EMH is true and that timing a highly efficient market like the NYSE is very difficult or impossible even for those who spend their whole lives trying to beat it. For someone whose primary job isn’t in investments I would put the idea of timing the markets out of your head. "I'd question whether a guaranteed savings instrument underperforming the stock market really is a risk, or not?  Rather, you reap what you sow. There's a trade-off, and one makes a choice.  If one chooses to invest in a highly conservative, low-risk asset class, then one should expect lower returns from it.  That doesn't necessarily mean the return will be lower — stock markets could tank and a CD could look brilliant in hindsight — but one should expect lower returns.  This is what we learn from the risk-return spectrum and Modern Portfolio Theory. You've mentioned and discounted inflation risk already, and that would've been one I'd mention with respect to guaranteed savings. Yet, one still accepts inflation risk in choosing the 3% CD, because inflation isn't known in advance.  If inflation happened to be 2% after the fact, that just means the risk didn't materialize.  But, inflation could have been, say, 4%. Nevertheless, I'll try and describe the phenomenon of significantly underperforming a portfolio with more higher-risk assets.  I'd suggest one of: Perhaps we can sum those up as: the risk of ""investing illiteracy""? Alternatively, if one were actually fully aware of the risk-reward spectrum and MPT and still chose an excessive amount of low-risk investments (such that one wouldn't be able to attain reasonable investing goals), then I'd probably file the risk under psychological risk, e.g. overly cautious / excessive risk aversion. Yet, the term ""psychological risk"", with respect to investing, encompasses other situations as well (e.g. chasing high returns.) FWIW, the risk of underperformance also came to mind, but I think that's mostly used to describe the risk of choosing, say, an actively-managed fund (or individual stocks) over a passive benchmark index investment more likely to match market returns." What are the risks pertaining to timing on long term index   investments? The risks are countless for any investment strategy.  If you invest in US stocks, and prices revert to the long term cyclically adjusted average, you will lose a lot of money.  If you invest in cash, inflation may outpace interest rates and you will lose money.  If you invest in gold, the price might go down and you will lose money.  It's best to study history and make a reasonable decision (i.e. invest in stocks). Here are long term returns by asset class, computed by Jeremy Siegel:  $1 invested in equities in 1801 equals $15.22 today if was not invested and $8.8 million if it was invested in stocks.  This is the 'magic of compound interest' and cash / bonds have not been nearly as magical as stocks historically. 2) How large are these risks? The following chart shows the largest drawdowns (decreases in the value of an asset) since 1970 (source):  Asset prices decrease in value frequently.  Financial assets are volatile, but historically, they have increased over time, enabling investors to earn compounded returns (exponential growth of money is how to get rich).  I personally view drawdowns as an excellent time to buy - it's like going on a shopping spree when everything in the store is discounted. 3) In case I feel not prepared to take these risks, how can I avoid   them? The optimal asset allocation depends on the ability to take risk and your tolerance for risk.  You are young and have a long investment horizon, so if stocks go down, you will have plenty of time to wait for them to go back up (if you're smart, you'll buy more stocks when they go down because they're cheap), so your ability to bear risk is high.  From your description, it seems like you have a low risk tolerance (despite a high ability to be exposed to risk).  Here's the return of various asset classes and how the average investor has fared over the last 20 years (source):  Get educated (read Common Sense on Mutual Funds, A Random Walk Down Wall Street, etc.) and don't be average! Closing words: Investing in a globally diversified portfolio with a dollar cost averaging strategy is the best strategy for most investors.  For investors that are unable to stay rational when markets are volatile (i.e. the investor uncontrollably sells their stocks when stocks decrease 20%), a more conservative asset allocation is recommended.  Due to the nature of compounded interest, a conservative portfolio is likely to have a much lower future value. I would say that the three most important skills are: Note that some costs are hidden. So, for example, a mutual fund investing in other countries than where you live in may mean the investment target country charges a certain percentage of dividends going to the mutual fund. The mutual fund company doesn't usually want to tell you this. There may be clever financial instruments (derivatives) that can be used to avoid this, but they are not without their problems. If you diversify into equities at low cost, you will have a very wealthy future. I would recommend you to compare two options: ...and pick from these options the cheaper one. If your time has a high value, and you wish to take this value into account, I would say it is almost always far better option to choose an index fund. Whatever you do, don't pay for active management! It is a mathematical truth that before costs, actively managed investments will yield the same return than indexed investments. However, the costs are higher in active management, so you will have less total return. Don't believe that good historical return would imply good future return. However, if for some reason you see an index fund that continuously loses to the index more than by the amount of stated costs, beware! Remember that unless you participate in the actual fund that these individuals offer to the public, you will not get the same returns they will. If you instead do something like, look at what Warren Buffet's fund bought/sold yesterday (or even 60 minutes ago), and buy/sell it yourself, you will face 2 obstacles to achieving their returns: 1) The timing difference will mean that the value of the stock purchased by Warren Buffet will be different for your purchase and for his purchase. Because these investors often buy large swathes of stock at once, this may create large variances for 2 reasons: (a) simply buying a large volume of a stock will naturally increase the price, as the lowest sell orders are taken up, and fewer willing sellers remain; and (b) many people (including institutional investors) may be watching what someone like Warren Buffet does, and will want to follow suit, chasing the same pricing problem. 2) You cannot buy multiple stocks as efficiently as a fund can. If Warren Buffet's fund holds, say, 50 stocks, and he trades 1 stock per day [I have absolutely no idea about what diversification exists within his fund], his per-share transaction costs will be quite low, due to share volume. Whereas for you to follow him, you would need 50 transactions upfront, + 1 per day. This may appear to be a small cost, but it could be substantial. Imagine if you wanted to invest 50k using this method - that's $1k for each of 50 companies. A $5 transaction fee would equal 1% of the value of each company invested [$5 to buy, and $5 to sell]. How does that 1% compare to the management fee charged by the actual fund available to you? In short, if you feel that a particular investor has a sound strategy, I suggest that you consider investing with them directly, instead of attempting to recreate their portfolio.