Why time in the market beats timing the market

As a long-term investor myself I learned that time in the market is the most important aspect of investing, whereas timing the market will make a negligible difference in the long run.

In the world of investing, timing the market refers to the strategy of buying and selling stocks based on anticipated price fluctuations. On the surface, it seems like an attractive proposition. Buy low, sell high, and repeat – voila! Wealth achieved, right? But the reality isn’t so simple.

On the other hand, time in the market refers to investing a certain amount of money regularly for a long period, irrespective of the market conditions. This strategy puts more emphasis on “how long” rather than “when” you invest.

This statement by legendary investor Warren Buffet encapsulates the philosophy of investing for the long haul. The objective is wealth accumulation over time rather than making a quick buck by timing the market.

Timing the market is speculative

Why is timing the market not the most efficient approach?

To understand this, we need to peel back the layers of the stock market’s inner workings. The stock market is not a monolith but a highly complex, constantly evolving ecosystem, influenced by myriad factors ranging from macroeconomic indicators to geopolitical events, from corporate earnings reports to sudden technological breakthroughs.

Trying to predict how all these factors will intersect to impact the direction of the stock market is similar to predicting the weather with 100% accuracy – virtually impossible. Also, you would need to consistently have accurate predictions over time.

Consider the financial crisis of 2008, a cataclysmic event that sent shockwaves through the global economy. No one could have accurately predicted the exact moment the crisis would hit, the depth of its impact, or the duration of the fallout. Similarly, the COVID-19 pandemic’s effect on the stock markets in 2020 was a bolt from the blue for even the most seasoned investors.

These events underline the fact that timing the market involves a large degree of speculation.

Time in the market enables compounding interest

According to a study by the Schwab Center for Financial Research, a hypothetical investment of $2,000 per year made at the beginning of each year in the S&P 500 index from 1993 to 2012 (which equates to a total investment of $40,000) would have grown to $87,020 by the end of that period, assuming all dividends were reinvested. This represents an average annual return of approximately 7% over the 20-year period.

This example is a clear illustration of how regular investments in a diversified portfolio, given enough time and a long-term perspective, can potentially result in substantial growth due to the power of compounding.

Learn more about compounding interest and how it can propel your wealth.

The best days in the stock market

Let’s consider a report from BlackRock, the world’s largest asset manager, highlighting the importance of staying invested in the market. This report looks at the U.S. stock market over a 20-year period from 1993 to 2013, and found the following:

• If you stayed invested for the entire period, your annual return would have been about 9.2%, resulting in a substantial gain.
• If, in an attempt to time the market, you missed the best 10 days during that period, your annual return would have been cut down to 6.1%.
• If you missed the best 20 days, your return would’ve dropped even more drastically, to just 4.5%.

Let’s look at a hypothetical scenario of what this would look like if you invested $10,000 over this period:

• If you invested $10,000 in the U.S. stock market in 1993 and stayed fully invested for the entire 20-year period, with an annual return of 9.2%, your investment would grow to approximately $56,044.
• However, if you missed the 10 best days during that same period, your annual return would decrease to 6.1%. Under these conditions, your $10,000 investment would grow to roughly $32,071 – a significant reduction from the $56,044 you would have earned if you had stayed fully invested.
• The difference becomes even more stark if you missed the 20 best days during the same period. With your return dropping to 4.5%, your initial $10,000 investment would only grow to about $23,998 – less than half of what you could have earned by staying in the market.

This illustrates how even a handful of days can significantly impact an investment portfolio’s returns over time. The key takeaway is that it’s time in the market, rather than timing the market, that can make a significant difference in long-term investment outcomes.

The strategy of the most successful investors

This philosophy of ‘time in the market’ is echoed by the investment strategies of some of the most successful investors of our time. Warren Buffett, for instance, has consistently advocated a long-term investment approach. His holding company, Berkshire Hathaway, is famous for maintaining stakes in companies for decades.

Another renowned advocate of this approach was John Bogle, the founder of The Vanguard Group. Known for introducing the first index mutual fund for individual investors, Bogle championed the concept of buying and holding a diversified portfolio. He believed that it’s not about timing the market, but the cumulative time in the market that delivers fruitful returns.

In conclusion, patience pays off

While the desire to make quick profits by timing the market can be strong, historical evidence suggests that long-term investing is the more reliable route to wealth accumulation. Stay patient and stick to your investment plan, so that you may reach your financial goals.

Learn how to create your own investment strategy, and stick to it.