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Why Time in the Market Beats Market Timing

Market timing is a strategy that involves predicting the future price of your investment. Timing the market is generally considered a risky strategy. Many investors and finance gurus believe it’s an elusive concept. On the other hand, some traders attribute their success to market timing and swear by it.

It’s impossible to consistently time the stock market and the economy. Imagine if we could all predict exactly when a stock was going to go up or down and when to buy or sell… we’d all be rich. But that isn’t the reality, and market timing can be a risky play for investors.

What is Market Timing?

Using stock charts to try to time the market movements

Trying to time the market involves predicting stock prices on a given day in the future. It’s an attempt to beat the stock market by forecasting its movement. Timing the market can take many forms. It might be a bullish or bearish play, as well as a short or long-term move.

If you buy today and think the stock price will be higher tomorrow, then you are market timing. Timing the market is a basic investing strategy for many traders. But it can be difficult for the average investor.

Market timers try to beat the market by buying at market bottoms and selling at the top. It normally involves technical analysis. An example of this is using historical prices to predict market movements. But it’s not that easy to predict the ups and downs of the market.

Our own Chief Investment Expert Alexander Green explained it best…

Everyone would like to be in the stock market for the rallies and out during the downturns. But doing it consistently is not possible. (You can take my word for it or learn the hard way.) Anyone can make a good call now and then. But market timing leaves you vulnerable to being out of the market for the upturns and in during the downturns. And that decimates performance.

Now that we’ve covered market timing… what is time in the market?

What is Time in the Market?

“Time in the market” is as simple as it sounds. Instead of trying to guess your investment’s next move, people don’t try to outsmart the market. Instead, investors focus on growing wealth long-term.

Simply put, it’s buy-and-hold investing. There is no predicting the future or buying and selling at a market’s lowest and highest point. You don’t focus on day-to-day or month-to-month losses.

Time in The Market Beats Market Timing – Every Time

A lot of evidence shows market timing doesn’t work on average. People who try to time the market tend to underperform compared to the buy-and-hold investors.

The traditional retail investor doesn’t have an edge against institutional investors and finding anomalies is harder than you think. Professional fund managers don’t even outperform the stock market. Some long-term studies show that active funds fail to beat the market close to 90% of the time.

There’s no way to consistently gauge the future direction of the stock market. On top of that, the costs often outweigh the benefits of shifting in and out of the market.

Investors who trade often can end up paying more in taxes. You’ll likely incur higher taxes if you sell a security that you’ve held for under a year. These fees are usually overlooked, but they add up and can put you at a disadvantage.

Investors who try to time the market might argue that long-term investors mist out on short-term opportunities. If played correctly, short-term volatility can help lock in extra returns. Although, that’s a big “if.” Research shows that your time in the market can be more valuable than timing the market.

Once you sell, there’s no way for your investment to have a chance to rebound. When you’re investing long-term, only the long-term trend matters. And stocks keep on hitting new highs over the past century..

Study Shows Market Timers Have Lower Returns Than Buy-and-Hold Investors

When you time the market, you’re trying to predict the future. The chance you’ll fail is high, and it’s hard to consistently win with this strategy. It might seem like a good idea, but buying and selling on market short-term predictions is often too good to be true.

There are investors who get lucky and win big. But that’s exactly what it is: luck. Very few people are good at predicting the movement of the stock market. You have to know how sectors of the economy will do before everyone else does.

For the retail investor, it usually makes more sense to invest long-term and hold through volatility. Having a diversified portfolio of investments over time has proven to provide greater returns than people who try to predict the market.

A recent study from Bank of America has quantified just how much opportunity is missed from timing the market. Data going back to 1930 revealed that if an investor missed the S&P 500′s 10 best days each decade, the total return would stand at 28%. But if the investor held steady through volatile periods, the return would have been 17,715%.

Final Thoughts

Predicting your investment is hard and risky. But it doesn’t mean you shouldn’t take advantage of opportunities in the market.

There are other strategies you can use to take advantage of the market and potentially win big. If you want to learn about other ways to win big, check out the best investing podcasts to help you learn strategies from investing gurus.

On top of that, consider checking out Liberty Through Wealth. It’s a free e-letter that’s packed with investing tips and tricks. Whether you’re a beginner or more advanced, there’s something for everyone.


About

Aimee Bohn graduated from the College of Business and Economics at Towson University. Her background in marketing research helps her uncover valuable trends. Researching IPOs and other trends has been her primary focus over the past year. When Aimee isn’t writing for Investment U, you can usually find her doing graphic design or traveling with friends.

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