The Golden Rule: Time in the Market Beats Timing the Market

Posted Sunday, April 11, 2021

An hourglass representing the time your wasting trying to time the market

Time in the market beats timing the market.

This may one of the most valuable ideas that new investors can learn.

At first glance, it doesn't seem to make a lot of sense. Investing is about making money, and buying a stock is like buying anything else, right? Shouldn't you wait to get the best possible deal so you can maximize your profits?

The sentiment is correct, but the problem is that timing the stock market is like jumping onto a moving train.

Would you rather try and jump on moving a train for free or just buy your ticket and board at the station?

I'm going to explain why timing the market is rarely a good idea, and how it could end up costing you more than 8% in long-term losses.

What is Time in the Market?

The concept behind "time in the market" is simple, you buy a stock and over time it will grow in value.

Once you buy stock your time in the market has begun. Your investment will experience all of the highs and lows associated with that stock until you sell it, which ideally will be after several years and significant growth.

It's a straightforward and skill-free approach to investing that focuses on steady returns as opposed to big gains.

What is Timing the Market?

"Timing the market" is a strategy focused on buying a stock at its lowest point, right before it begins to go up, and selling the stock at its highest point, right before it begins to drop.

If timed perfectly you would maximize profits on your investment by getting the absolute best value on your buy and sell transactions.

While it sounds great in theory, consistently timing the market is impossible.

Stocks can trend up and down due to any number of factors:

  • An earnings call
  • A tweet from an executive
  • A lawsuit
  • A natural disaster
  • A meme

Although studying company data and reading chart signals can help you predict a stock's movement over time, there's no surefire strategy to predict how a stock will perform on any given day.

Timing the Market Can Cost You Big

For casual investors timing the market is usually a decision driven by fear.

Should I wait until the price is lower? What if I buy too high and end up losing money?

A person to ashamed to show their face because after they tried to time the market

When making decisions on long-term investments it's important to avoid thinking about the short-term outcomes. Your eyes should be set on the prize. The prize is the growth you'll see several years down the road, not the couple hundred you could save waiting for a dip that may never come.

There is tons of research supported by decades of market data that says that having money in the market during its best days is extremely crucial to getting the most out of your returns.

As this article from Capital Group explains, if you were investing in the S&P 500 between 2009 and 2019, missing out on the 40 best days in the market would have turned a 10.75% gain into an 8.18% loss.

Stick to your plan, stay along for the ride, and you should be okay.

Try Dollar Cost Averaging

If you really can't kick the negative feelings behind seeing your investment drop soon after you buy in, try Dollar Cost Averaging.

Dollar Cost Averaging is a strategy where you break your total investment up over a period of time instead of investing it all at once.

For example, say you have $1000 to invest. It's the first of the month and time to buy stocks, but the price of your favorite index fund is making you a little hesitant to go all in, so maybe you invest $500 today and $500 in two weeks. That way you can guarantee you're getting a deal in at least one of the two investments.

Don't Pretend to Be an Expert

If you're not driven by fear then maybe you're driven by fearlessness.

While it's true that missing the best days in the market can negatively impact your investment in a big way, avoiding all of the worst days could net you a big gain. To persuade you to let them manage your money, Blue Square Wealth put together this write-up that explains that over the past two decades (1998-2020) if you missed the 10 worse days of the market you could have doubled your investment.

There's only one huge problem with that. How could anyone have identified and avoided the worst 10 days out of the roughly 3,036 trading days during that time frame?

A guy who is trying to become an expert

I often remind myself that every year, billion-dollar corporate hedge funds on Wall Street have teams of the brightest analytical minds running some of the most advanced financial software imaginable to attempt to time the market for big gains.

And in the past 10 years 85% of these funds ended up underperforming the S&P 500 over a 10-year span.

I'm an average person with very little time and no patience to study charts and signals every day. What will it take to for me to be able to beat the average S&P 500 by the time I'm ready to cash out?

Be realistic with the goals you set for yourself and understand the level of effort it would take to strategically beat the average market returns. Is it truly worth the risk and work involved?

Think about it this way.

If somebody said you could earn $500 just for attending a basketball game, or you had the option to earn $1000 but I'd have to score a basket in a 1 vs 1 against Lebron James, what option are you taking?

I'm taking the easy $500.

We're Talking About Pennies

There's a famous clip of former NBA player Allen Iverson where he say's, "We're talking about practice. Not a game. We're talking about practice."

Reporters were grilling him on why he missed a practice, and he was trying to figure out why they were spending time making a fuss over a single practice when he plays over 70 games a year.

That's how I feel debating about timing the market as a casual investor.

We're talking about pennies.

A handful of pennies

Not literally, but in the grand scheme of things that's what it feels like. Most people are trying to save $100-$200 on their monthly investment when the real focus is to grow a portfolio over a million dollars.

Don't waste your time on the small, unpredictable wins, focus on how to get the biggest, most reliable returns. Use that energy to build passive income streams and figure out how you can save a bigger percentage of your earnings.

Set It and Forget It

Unless you feel like you've cracked the code on the stock market, don't worry about timing the market.

For almost all casual investors time in the market beats timing the market.

Follow these 5 steps and keep investing simple:

  1. Pick an index fund
  2. Make a plan to figure out how long you expect to hold it and how frequently you will invest into that fund over that period
  3. Invest based on your plan regularly regardless of the market price.
  4. Don't panic sell.
  5. Sell when you're ready to cash out on your investments based on the plan you have set for yourself.

Instead of investing time and energy into timing the market, use that effort to grow your wealth through other aspects of your life.

Do you agree with the reasoning I've outlined about? Did this help at all? Reach out and let me know!


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