In the investing world, there are a lot of debates about market timing and whether it is better to time the market or stay invested for the long term.
Many people believe that time in the market is always better than timing the market.
According to CNBC, “almost 80% of active fund managers are falling behind the major indexes.” It seems pretty apparent that most day traders have a difficult time beating the S&P 500 in the long term.
This blog post will explore why ‘time in the market’ beats ‘timing the market’. We will examine what these terms mean and discuss some of the top reasons investors should focus on time in the market rather than trying to time the market!
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What is Market Timing?
The term “market timing” is often used to describe the act of trying to predict future market movements. In other words, to buy or sell stocks at advantageous times.
An investor might believe a stock is due for a short-term price decline and sell the stock before the decline.
Many individual investors and even professional money managers believe they can successfully time the market. But there is no clear evidence that this is possible in the long run.
Most investment experts recommend against attempting to time the market.
What Does Time in The Market Mean?
Time in the market refers to the concept of staying invested for the long term. Even if there are short-term fluctuations in the market, investors should remain patient and not make any rash decisions.
Many experts believe it’s impossible to consistently time the market and let your investments ride the ups and downs.
Top 8 Reasons Time in the Market Beats Timing the Market
There are several reasons why market timing is difficult. Each side of the debate has valid points, but the long-term investor is more likely to come ahead.
Here are eight reasons why time in the market beats market timing:
1) It’s impossible to know exactly when the market will rise or fall
First, it is challenging to predict future market movements with any degree of accuracy, especially if you’re trying to do this long-term.
Even professional investors who spend their careers analyzing companies and markets have trouble consistently making correct predictions. Knowing where the market will go next is a tough task.
2) Difficult to predict the exact time
Second, even if you can correctly predict short-term market movements, you still need to be right about timing your trades.
The market can stay at a certain level long before moving in the predicted direction.
3) Lose out on a great position
If you sell stocks when the share price rises, you might not get back in at the same price. This is because once a stock starts rising, it can continue for a long time.
4) Commission fees
Another factor to consider is commission fees. Every time you buy or sell stocks, you will have to pay a small fee to your broker.
These fees can add up quickly if you are constantly buying and selling stocks. Commission fees can eat into your profits if you’re not careful.
5) Taxes
You will have to pay capital gains taxes if you sell stocks that have increased in value. By holding on to these stocks for more than a year, you’ll be eligible for long-term capital gains tax rate. The long-term rate is lower than the short-term rate.
6) Timing the market is stressful
Attempting to time the market can be a very stressful endeavor. Constantly monitoring your stocks and deciding when to buy or sell can affect your mental and emotional health.
A stock market is a volatile place, and prices can change quickly.
7) Too time-consuming
In addition to being stressful, market timing can also be very time-consuming. If you are trying to predict short-term market movements, you will need to spend a lot of time analyzing data and making calculations. You could be taken away from other important things such as work, family, and friends.
Even if you are not actively trading now, traders that try to time the market still need to spend a lot of time following the market and researching stocks.
8) Miss out on compound interest
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. This was a famous quote by Albert Einstein and it is very true.
Compound interest is when you earn interest on your investment, and then you also earn interest on the interest that you have earned. Your money will grow much faster than if you let it sit in a savings account.
If you are constantly trying to time the market, you will miss out on the opportunity to let your money grow through compound interest. You will constantly be moving your money in and out of stocks, which means you will not have the chance to let your investment grow over time.
For example, let’s say you invest $1000 in a stock that goes up by ten percent. After one year, your investment would be worth $1100.
If you reinvested this money and the stock rose by ten percent again, your investment would be worth $1110 at the end of the second year. After 30 years, you will have $17,449.40. If you were to try and time the market, you would likely miss out on some of these gains.
If you sat on the sidelines and stayed in the market for 15 years, you would have only made $4,177.25. This is only if you picked the 15 years that the stock sustained a 10 percent average.
You may be able to time the market a few times, but to do it consistently over multiple decades, is highly improbable. The longer you stay in the market, the higher probability you will continue to compound your investments into financial freedom.
The more you trade, the higher the probability that a mistake will be made, leading to a large loss of both time and money.
It is important to remember that the stock market is a long-term game. After all, if one of the most intelligent minds in history prefers time in the market over timing the market, it should be good enough for the regular person.
The Bottom Line
There is no clear evidence that anyone can successfully time the market in the long run. Many investment experts recommend against attempting to time the market, and there are several reasons why time in the market beats market timing. Some traders are successful. However, about 80 percent or higher lose money.
If you leave your money in an index fund that tracks the S&P 500, you are more likely to make money than if you try to time the market. This is especially true when you let compounding happen and stay patient for decades.
There are many reasons why market timing is difficult, but ultimately the long-term investor is more likely to come ahead.
By staying invested in a diversified portfolio of index funds, you can weather the ups and downs of the market and be well on your way to reaching your financial goals!
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
