Time in the Market vs Timing the Market
Time in the Market vs Timing the Market
The term “time in the market” and “timing the market” are phrases to describe how to contribute to your investments.
You need to understand the difference between time in the market vs timing the market to maximize your investment returns as your wealth grows over time.
Often, the best option is to have your investments be placed time in the market rather than trying to timing the market for long-term growth, but we’ll go over the pros and cons between the two.
Time in the Market
It’s an investment strategy to continue contributing to your investments periodically. Another term for this is dollar-cost averaging.
For example, you will invest $100.00 to your financial portfolio every week is time in the market.
You will contribute no matter if the financial markets are doing good or bad, and remove the guesswork on when to invest.
Following a habit of contributing to your investments periodically will generate large amounts of wealth in the future.
It’s hard to discipline yourself to invest your money on a set schedule rather than spend it now, but you will thank yourself in the future.
Benefits of Time in the Market
1.) Removes Emotional Investing
You remove the feeling of regret or hesitation that’s associated when buying or selling an investment.
We have these feelings from buying or selling at the wrong time or continue to wait for the opportunity of a better price.
Investment prices fluctuate and can exceed our expectations of better purchase price or higher selling price, which creates this emotional feeling.
If you keep waiting for the perfect investment price, it may never come, and you’ll miss the opportunity to buy at a lower price if the investment grows.
Historically the market overall grows on average 7% investment returns each year, including recessions.
No matter what you’ll receive if you contribute to investments that fund the overall market you’ll come out with a positive investment return.
2.) Avoids Bad Timing the Market
An example of bad market timing would be making a large investment purchase before a recession.
In this situation, the value of the investment decreases drastically, and investors are paying for more than what it’s worth.
Depending on the type of investment, you may need to wait for months or years before the investment returns and exceeds the original investment price.
Cons of Time in the Market
1.) Missed Opportunities for Higher Returns
Time in the market reduces the risk, but at a lower rate of return.
A study done by Vanguard shows if you invested your money in a lump-sum historically, then you’ll produce a 66 percent better investment return than time in the market.
However, this is assuming you have thousands of dollars in cash ready to invest.
Otherwise, the best option is to follow a dollar-cost average strategy as many people don’t have large amounts of money to invest after paying for living expenses.
2.) Investment Choices
Even if you follow the dollar-cost averaging method, you must research and review what investments are performing well and are best suited for you.
An investment that has a history of poor performance will more than likely not improve in the future. Do your research before committing.
Timing the Market
This investment strategy anticipates the market to buy and sell at the predicted price. If investors can predict the market, then they can profit greatly.
It’s not a long-term strategy as you must continuously watch your investments for the right moment to buy or sell. It’s also known as market timing.
You’ll need to have large amounts of money to leverage buying at an all-time low instead of spreading your investment spending over time. It removes the risk of future losses and avoids buying at high investment price points.
Benefits of Timing the Market
1.) Larger Profits
If you can predict when to buy low and sell high, then you’ll profit more than time in the market.
By purchasing an investment at an all-time low point and letting it grow over time, profits will be more than buying when prices fluctuate.
Cons of Timing the Market
1.) Difficulty
It’s near impossible to predict the time the market to maximize the benefits.
Average investors have the most difficulty in timing the market as they require the education and tools to calculate potential future outcomes on investments.
Less than 1 percent of portfolio managers can continuously time the market year after year. It’s doable to time the market, but you’ll more than likely end up with more losses and costs.
2.) Costs & Fees
Following a market timing strategy requires you to pay more taxes and fees.
Selling a profitable investment in the short-term (1 year or less) will require you to pay a higher tax rate than you would’ve held for the long-term (more than one year) and sold it.
Depending on the type of investment, you’ll pay more on fees for buying and selling.
Review if your investment has high expense fees and if there are additional costs. You may end up with more losses if you aren’t too careful.
3.) Daily Attention
You must monitor your investment price and news for updates. Financial securities can easily change, and you must quickly make adjustments on whether to buy or sell an investment at a moment’s notice.
You can use different types of orders to set a specific price to buy or sell such, as a limit order, stop order, or stop-limit order.
However, if the investment price reaches the order price requirements, it will execute.
There is the chance the investment price would be at a lower discount or higher selling price than what you set as the order. It’s why you may need to watch it yourself to make that decision.
Time in the Market and Timing the Market Study
A study done by Charles Schwab compares five different investment styles and compares the investment returns between time in the market and timing the market.
It will use the S&P 500 index fund as the investment type to capture the overall market of 20 years between 1993 – 2012. Each investor will get an annual $2000 to invest.
The results show that perfectly timing the market results in the highest return of $87,004, but investing immediately and time in the market (dollar-cost averaging) investment returns are roughly $80,000.
A $7,000 difference but a small amount compared to the amount of work you must put into to perfectly time the market.
Overall for most investors, it’s best to follow a dollar-cost averaging strategy instead of timing the market. You will reduce the risk and increase wealth over the long-term.
If you choose to time the market, understand the risks and costs that come with it. The difference in investment return from bad market timing and dollar-cost averaging is 9.7% less.
