Time In The Market Vs. Timing The Market

Odds are, you’ve probably heard countless people tell you they bought stock in Tesla, Apple, Amazon, or any other big-name before its stock doubled. They may want you to believe that they’re some kind of stock forecaster. But the truth is, nobody can predict the stock market. There are too many factors to take into account. Just take 2020, for example. Did you know anyone that predicted a worldwide pandemic? Probably not. But that doesn’t stop people from trying to predict a stock’s future price, which brings us to the topic of this post: time in the market vs. timing the market. They may sound similar, but that’s where the similarities end. Let’s start by defining each.

Time In The Market

“Time in the market,” often referred to as “buy-and-hold investing,” refers to a strategy of buying the market and sticking with it long term. Typically, these securities or funds are held onto until the investor’s goal is met—e.g., they’ve reached retirement age. This strategy is considered passive investing. Most people agree, and studies have shown that this strategy works.

Timing The Market

In contrast, “timing the market” is a bit more controversial. Some people make their living timing the market, and some people are completely against it. Investors who try to time the market are attempting to buy securities with the expectation that they can sell them at a higher price in the short term. This can be referred to as “beating the market.” While the concept is simple, “buy low, sell high,” predicting the future is anything but simple.

Which Strategy is Better?

Time after time, study after study, has shown “time in the market” is the winning strategy. Beating the market involves accurately predicting the market. However, the combination of market volatility and individual investor behavior makes this nearly impossible.

Behavioral Challenges

In a study by the University of California, Berkeley, research showed that investors that try to “beat the market” typically underperform. They found those individual investors:

  • Sell winning investments while holding losing investments
  • Are influenced by limited attention and past return performance
  • Engage in naïve reinforcement learning
  • Tend to hold un-diversified stock portfolios

It seems that even if individuals can predict the market, they still make decisions that negatively affect their financial wellbeing.

Market Volatility

If anyone tells you they can predict stock prices in the short term, don’t believe them. Maybe they have a strategy that’s resulted in a few wins, but nobody has a crystal ball. There are too many factors that affect stock prices; active traders and investors, machines with super fast algorithms and high-end servers, the continuous flow of news, disasters, international data points, politics, etc. Something new is happening every second of every day. There’s just no way to predict what a stock price might do tomorrow or the next day.

But Over Time…

Holding on to investments pays off. In the past 45 years, from 1975 to 2019, the Standard & Poor’s 500 Index only experienced a loss 10 times. Furthermore, a Charles Schwab study found that a 20-year hold never produced a negative result from 1926 to 2011. Those that put their “time in the market” typically aren’t concerned about timing because they’re in it for the long haul. They’ve completely removed market volatility and human behavior from the mix.

However, choosing to hold on to funds doesn’t mean you should simply buy and forget about it. You can smartly manage your investments along the way. For example, you can capture an unrealized tax loss and replace that security or fund with a similar asset. Or you can make allocation adjustments depending on your age. These can be any activities that aren’t too costly or time-consuming.

Set It and Forget It

There’s no secret recipe to investing. There are clear ways to invest the right way. Diversified portfolios that are held on for years provide greater returns than trying to beat the market. When you invest your time and money, good things happen. Are you ready to start passively investing? Speak with one of our advisors today!

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