Why time in the market beats timing the market

05/05/2022

If you’ve read anything about investing, or even if you’ve just done some very simple research about investment markets, it’s very likely you’ve seen the common investment adage: “time in the market beats timing the market.”

It’s often referred to as the “golden rule of investing”.

In this article you can read my analysis of why it’s such a common mantra heard all over the investment industry, and why it’s just as true now as it’s been since it was first used.

Doing nothing is often the best thing to do

“Timing the market” is a strategy followed not only by amateur investors, but also by professional fund managers.

Their aim is to buy stocks when they believe their value is low, and then sell when they reach their peak. Sometimes they are successful, and they will show a tidy profit. But, just as often, they get the timing wrong and either face reduced profits or a loss.

Experience and data both demonstrate that focusing more on the length of time you hold your investment assets for – “time in the market” – means you’re more likely to see your portfolio value increase.

Sitting tight and doing nothing is often a better strategy than constantly buying and selling.

What makes you think you’ll beat professional fund managers?

Investment managers working for some of the largest financial institutions will be supported by teams of analysts and researchers. They’ll have access to the most up-to-date financial information from the companies they are looking to invest in – and are likely to have visited many of them.

Despite this, Business Insider reported that close to 9 out of 10 actively-managed funds (those managed by fund managers) failed to beat the market over 15 years up to 2020.

What kind of chance do you think the average stock-picker – maybe following tips in the financial sections of the weekend press – has against fund managers with their inherent advantage of resources and support?

Mind the (investment) gap

Investment analysts Morningstar publish an annual report that looks at the difference between the performance of actual funds and indexes, and the returns investors received from investing in those funds.

The report, titled “Mind the gap” is very instructive for the purposes of this article.

In the US in the 10 years up to the end of 2020, the “gap” in question was 1.7% each year. This was the difference between the 7.7% investors earned from the funds, compared with the 9.4% annual return over the same period.

As a result, 1.7% was the shortfall suffered by investors due to their inability to time the market.

It’s not just a matter of timing

Another factor that makes trying to time the market so problematic is the nature of investment fund administration. The delay between your instructions to sell being received and actually actioned mitigates against the idea of making quick decisions to try and maximise your returns.

While share purchase and divestment will normally take place on the same day, instructions to buy or sell certain investment funds can take anything up to six days.

That makes it virtually impossible to react quickly to a specific announcement or economic fluctuation.

Are you feeling lucky?

If you’re looking to time the market, you need not one dose of good luck, but two.

For example, you may feel that some of your equity holdings have reached their peak value and decide to sell and move to cash.

At some stage in the future, however, you’ll probably want to switch out of cash and back into stocks and shares.

That means you’ll need to get your timing right twice.

The value of investment advice is proven

In a detailed research study, leading fund managers, Vanguard Asset Management quantified the value of financial advice at an average of 3% annually.

The key area where they believe investment advice can make a significant difference to your outcomes is through behavioural coaching.

Maintaining a disciplined approach to investing can help underpin your portfolio performance.

Illustration of this point comes out in research caried out by Dalbar, Inc., a company that studies investor behaviour and analyses market returns.

Their study found that, for the 20-year period ending on 31 December 2019, the Standard and Poor’s (S&P) 500 Index averaged a return of 6.06% a year. The average equity fund investor earned an annual market return of only 4.25%.

Have a plan and stick to it

By being disciplined, and having a plan and sticking to it, you can give yourself a far better chance of investment success than by trying to beat the market with a series of impulsive decisions.

Your plan should be informed by several different factors that will be unique to you. These will include:

  • Your attitude to investment risk
  • Your capacity for financial loss
  • Your investment time frames
  • How your investments fit in with your wider financial planning.

I usually find that putting an investment plan together can take time. It’s not something that should or can be rushed because it’s the foundation of your financial plans and future.

You should consider any changes carefully, using detailed cashflow modelling and analysis rather than be driven by short-term market movement.

Get in touch

If you want to talk through your investment plans, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

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