When I was younger, I sometimes tried to time the market. If there was a stock I was interested in purchasing, I would watch it until it got to a point where either I would purchase it or it would have increased in price so much that I missed the opportunity. Over time – and by watching my accounts (like my retirement accounts) in which I invested regularly and couldn’t time the market – I’ve realized the futility of my efforts. While you may get lucky occasionally, most people agree that there’s no way to consistently buy at the absolute bottom and sell at the very top.
A better approach – time in the market
Time in the market is essentially buy and hold investing. You purchase investments and hold them for a long period of time, no matter what the market is doing. Here are a few of the reasons market timing doesn’t measure up to time in the market.
Difficult to time the market. If you have watched the overall stock market for any length of time, you’ve seen price movements that made no sense. There are still days where the overall stock market starts out positive and then reacts to some event that moves them negatively (or vice versa). At the individual stock level, price movements can occur due to company dynamics, the competition, macro-economic events, or even if the opposing party took over the Senate or House.
You have to be right twice. Let’s say you’re watching a stock for several weeks that recently has been on a downward trend. The moment you (luckily) purchase the stock, its price starts rising. For weeks, it gradually increases in value. Yet you aren’t done with market timing, because now you have to determine when the stock will reach its high point while hoping there’s not an event that pushes it back to the price at which you bought or even lower.
You may wait too long. As I mentioned above, sometimes I have a hard time pulling the trigger. I’ve watched stocks in the past that have reached never-before-seen lows, and still greedily waited for a lower price. Inevitably the stock will start climbing, at which point I wait again for it to reach those lows, only to watch it add 10 or 20%. Trying to perfectly time the market means you may miss out on a great investment.
Commissions, fees, and taxes can cost you. When you’re buying and selling stocks, unless you’re in a tax-advantaged account (like a pre-tax retirement account) you may pay fees for each transaction. And if you try to save on taxes – like waiting to sell until you’ve held the stock for more than a year – you may miss the high point and end up holding a laggard.
Do you want to watch stock prices like a hawk? Is this how you want to spend your time, regularly checking stock prices or having a ticker running on your computer while you’re working? Do you want to spend weekends researching new investment alternatives for when you sell your current ones? Are you confident in your ability to consistently spot highs and lows? Will it keep you up nights if you’re wrong? Market timing takes a lot of time and can add stress onto your life.
You might miss the home runs. Studies have shown that missing the big moves in the market can reduce your overall gains. In fact, if you just missed out on the ten best days between 2007 and 2022, your returns would be halved from 10.66% to 5.05%. Naturally this goes the other way too – if you miss out on the worst days your return would be higher than if you remained invested.
The Oracle
Warren Buffett is largely seen as one of the top stock market investors of all time. His net worth is nearing $100 billion. You might think he is a proponent of market timing. He’s not.
“I have never known anyone who could consistently time the market. And in fact I’ve never known anyone who knows anyone, who was able to consistently time the market…” — Warren Buffett
He goes on to note that over time, stocks do well. Look up almost any 30-year snippet showing stock market returns and you’ll find positive results.
Pot stocks
I’ve been following cannabis stocks for a few years. When the Democrats were elected and took both houses of Congress, these stocks showed positive returns. When there was talk of opening the banking channels to them, again there was a bump. More recently, with Republicans winning the House majority, these stocks have tanked. Yet another rumor of opened banking raised prices again. So, when would you have bought? When would you have sold? Would you have been confident enough to sell when both houses of Congress were Democrat and everyone “just knew” that banking reform was around the corner, or would you have waited?
The best move for the vast majority of investors is to buy a quality investment and hold it for a period of time. Maybe that’s a few years, maybe that’s a lifetime. But until someone – anyone – can prove they are adept at market timing and is willing to share their formula with you, time in the market has proven to be a better option.
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