Why Time in the Market Beats Timing the Market

Market timing refers to trying to predict future market movement to buy or sell at the best price. Here we’ll look at why it doesn’t work, and why you should stay the course and go ahead and invest as soon as possible to maximize time in the market. In short, time in the market beats timing the market.

// TIMESTAMPS:

00:00 - Intro - What Is Market Timing?
01:13 - Time in the Market Beats Timing the Market
04:54 - The Costs of Market Timing
06:49 - Conclusion - Time in the Market Beats Timing the Market

// SUMMARY:

Market timing describes the speculative strategy of trying to time one’s trades based on predictions about future market movement.

Just like with stock picking versus passive indexing, the evidence overwhelmingly suggests that successfully timing the market is all but impossible, for the simple reason that market movement is essentially random and unpredictable, as all available information is already priced in. One cannot expect to accurately and consistently time the market. In fact, the practice is usually more harmful than helpful.

Studies suggest that “time in the market” is the way to go. That is, invest early, hold for the long term, and ignore the short term noise. Stay the course, as Jack Bogle said. In doing so, we’re relying on the simple premise that the market tends to go up more than it goes down, so we don’t need to try to time its movement. As long as the fundamental reasons for investing in the first place haven’t changed, the “time in the market” investor simply keeps buying regularly, regardless of market sentiment or valuations.

The most significant cost is missing out on market gains while sitting on cash, which intrinsically makes the investor’s asset allocation more conservative. This is again the main reason why lump sum investing beats dollar cost averaging, but the point is even more important in this context, as the market timer may be sitting on cash for months or even years in anticipation of a crash.

In investigating the purported merits of market timing, we find yet another example illustrating how passive index investing beats active management on average, and of course that “time in the market beats timing the market” indeed. Trying to time the market is usually more harmful than helpful, and missing out on just a handful of days of market gains can have huge ramifications in the form of lower returns.

Pick an asset allocation based on your personal risk tolerance and time horizon, establish an emergency fund, invest early and often in index funds as soon as money becomes available (don’t DCA), diversify broadly across asset classes and risk factors, rebalance regularly, stay the course, and ignore the noise.

#investing #markettiming #stockmarket

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[OptimizedPortfolio]

How have your market timing endeavors gone?

[dustinjones]

That stat from Schwab is incredible. "Missing the 10 best days in the market from 2001-2020 cut your total return in half" I'm just a typical passive investor to my 401k. But I've watched 100's of hours of finance videos like this the past 2 years, and this is the most incredible stat I've seen.

[translumination]

Back in 2017 I had half a million dollars to spare. For some reason I thought the stock market was so overvalued that I wanted to wait until the market crashed. I waited and waited... and over all that time the market simply raced ahead and never looked back. Same with the housing market 20 years ago. It simply couldn't have gone any higher in Sydney. And it did again and again over that time period. I was always worried it would crash the moment I invested my money. The way I should've thought about that was that you just keep on buying or paying debt off regardless of what happens and eventually you be rewarded if you stayed the course.Lesson learnt.

[jugzster]

I’m exceptional at market timing. Every time I buy, the market goes down

[mispricedstallion]

John, I wonder if diversion from historic trend, say on P/E multiples, impacts the effectiveness of lump sum investing. For example, I'm curious if there is a way to historically determine by how far above trend we are at a given time whether DCA or Lump Sum would be most effective historically?

[osn]

What about Bitcoin and altcoins, same strategy ?

[RicardoHernandez-zrpw]

If you are able to time the market correctly every time then you’ll definitely be well of financially of course! Easier said than done however.

[tigenesis]

DCA is better during bear markets & lump sum investing is better during bull markets

[vincentwong]

That Schwab statement is just stupid. I am too lazy to run the number, but I petty sure if you miss the 10 best AND WORSE days in the market, you return will be better. You still shouldn't try to timing the market tho