Whether you’re a batsman lining up at the Ashes, a dummy half looking to pass onside or simply a young professional in a hurry to an important meeting, your timing will be the difference between success and failure most if not every time. In fact, if you look back at the life you’ve lived so far – if you think about it really thoroughly, you’ll find that your timing has often been a substantial factor in the most important events of your life.
Well, it’s exactly like that with investing, especially in the stock market.
In the long term, timing might refer to getting in on an asset at the stage, where the cost/reward ratio is still low, but there’s already undeniable potential of putting your money in said asset. For example, investing in Google back in 2004, when it first went public. Or Bitcoin, even if just for fun. And then holding on for it long enough. Similarly, Tesla stock has seen its fair share of rapid growth over the years. All these and many more assets have granted their investors a massive expansion of their investments over time. However, timing these sorts of investments usually requires you to know when to get in and then – some patience. This is called the buy-and-hold strategy.
In the short term, timing is another beast altogether. And that beast is market timing.
The simple definition is that market timing means buying or selling based on a prediction. The idea is that doing this allows the investor to be more profitable because of the ‘maximum’ price margin between the lows and the highs in the market. Market timing is considered one of the basic strategies for traders.
Wait a minute! Isn’t more profit a good thing?
The problem with timing the market is that it’s near impossible to do so in the long term. And that’s only if you’re a professional trader. For the average Joe out there, doing so just even once is a really difficult task. Both from the technical aspect, as it takes more effort and time than most of us are willing to spare. And the emotional aspect, too – it is extremely human to react to successes and failures emotionally, therefore influencing your own future decisions.
If you’re just the average investor, like most of us are, it’s better to steer clear from trying to time the market. If you have limited time you can allocate towards market research and want a much safer investment, the best stick to another strategy. That way, the amount of time and energy spent managing your assets will be far lower.
Of course, proponents of the strategy will tell you how they’ve mastered it and will offer you their services. At a cost, naturally. What they will most likely fail to disclose, however, is that over the long term, trying to time the market may prove to be less lucrative than long-term investing. This is due to the fact that there are just too many things taking in how the market moves, and it’s very hard to factor in each one of them.
Because of this, and considering how much additional stress and exhaustion, market timing may cause – you simply shouldn’t overlook the benefits of a buy-and-hold strategy.
For example, the Bank of America published a research last year, consisting of data from every decade since the year 1930, showing that market timing has the slimmest of margins of success.
The data showed that if an investor had sat firm on his investments in S&P 500 over the past 90 years, the combined return would’ve been 17 715%. Yes, that is not a typo. However, if an investor had been dabbling in market timing over all that time and missed out on the best 10 market days per decade, the combined return would sit at 28%. Again, not a typo.
Sure, had an investor evaded the 10 worst days per decade, the return would be a staggering 3 793 787%. And, missing out on both the 10 best and 10 worst days per decade would’ve turned in a still enormous profit of 27 213%. Oh, if only I’d a time machine and a dollar.
Market timing is often less than the sum of its parts
It is easy to look at past data and think – I knew it would’ve happened as it did! I should’ve bought/sold instead of holding firm. Or the other way around. But, if you consider the minuscule margin of error the previously mentioned data showed, wouldn’t it be better to just invest and let your wealth grow over time, instead of chasing quicker-but-highly-risky profit.
Besides, the same data shows us that, while you’ve withdrawn from the market you’re potentially missing out on substantial returns, since you’re not always going to be able to predict the 10 best days (or the 10 worst, for that matter).
It’s undeniable that those who can correctly time the market over a longer period will profit substantially. Yet, in order to monitor the market and your assets, as well as continuously look for new potential investments to maintain or increase the profit margin will take away most of your time. If you wish to continue on your career path as well as maintain a healthy work/home balance over the rest of your life, becoming an active portfolio manager will not suit you.
Honestly, market timing can be a great strategy. On paper. But in real life, all the aspects we’ve gone over here plus many, many more make this strategy an ill fit for people who just want to invest for their futures. In real life, market timing, especially in the long-term, may prove to be as elusive as Bigfoot. Or Nessie.