Time in the market vs Timing the market

The finance industry likes to remind clients that 'time in the market' is more important than 'timing the market'.

This is one of the dangerous half truths that harms investors when taken out of context.

The common statistical argument for time in the market is that if you miss the 'best days' in the markets, your returns will suck.

This is true. Based on a research by University of Michigan, a buy and hold strategy will yield 10.84% per year (between 1963 to 2004). But if an investor tried to time the market and missed the best 90 trading days, the returns dropped to 3.2%!

Hence the financial advice is to stay invested, or 'time in the market', so as not to miss the best days.

But the advice usually omit the fact that if you miss the worst days, your returns are even better.

In the same study, missing the worst 90 days would result in achieving 19.57% return per year over the same period!

So missing worst days are better than investing through the best days. In this case, 'timing the market' pays better than 'time in the market'.

Of course the financial industry has vested interest. Majority of the fees are charged based on the value of managed assets. 'Timing the market' is disruptive to their revenue. 'Time in the market' provides steady fees.

To be fair, timing the market is not easy. Mistiming the market can cost a career and hence very few finance professionals dare to risk it. And the chances of mistiming are high.

Thus, staying in the market is an easier and safer task.

There are indeed situations whereby time in the market are preferred - well-diversified investments such as an index fund or growth stocks.

Indices generally go up over the long term due to GDP growth and inflation. But of course there are caveats - not all country indices go up in the long term - ask the Japanese. But generally most developed markets do.

As for growth stocks, time in the market is important because you need time for compounding effect to take place.

For other situations, timing the market are more important. The most obvious is when you use technical analysis to decide your trades. It could be swing trading or momentum, there is a time to buy and sell.

Similar for value stocks. These are not the best companies and may not do well over the long term. The profits come from heavy mispricings and not due to growth. - buy when the price is overly discounted and sell when the price rebounds. Value stocks have to be timed.

The worst is when investors abuse the 'time in the market' advice. They bought a stock and the stock price declined. Deep down they knew they have made a mistake but it is too painful to realise the loss. So they hold the stock and tell themselves they are long-term investors.

Unfortunately most stocks cannot last the test of time and hence time in the market becomes harmful. Time will not heal the wounds because these stocks may not return to the price they bought.

Time in the market doesn't cure all your mistakes.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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  • JonathanRio
    ·2022-06-25
    Timing the market is difficult. is there an statisitics that someone is able to buy at the bottom with a chance of more than 60%?
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    • YBKReplying toFattAgain69
      [Like]
      2022-06-26
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    • FattAgain69
      Timing the market does not mean you have to catch the top or bottom of the market. If you have the gut feeling or combinations of indicators telling you the market has fallen enough, go right in.
      2022-06-25
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  • Jason1616
    ·2022-06-21
    While i do agreed staying in the market but at the same time do know when to take partial profits when stock price or indexes at its peak. No harm locking your profits.
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    • Ironman2002
      Yes, a bird in hand is better than a bunch of birds on the tree!
      2022-06-25
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    • jayel
      yes, true to this as well
      2022-06-21
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  • u0402215
    ·2022-06-25

    I always have the tot that if by staying in the market the stock kenah whacked so many times until it become damn cui then even if it recovers in 'the best days' the recovery might not make up for it

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    • snarly
      So very true
      2022-06-25
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  • 慢的老人
    ·2022-06-25
    This is well written with much thought. Time in the market is a suicidal strategy for highly speculative trades. Always set a price for cutting loss or profit taking. Learnt my lesson the hard way.
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  • RDPD富爸穷爸
    ·2022-06-21
    To be fair, time in the market doesn't work only if one is holding lousy business. If one cannot identify a good business it make sense for them to just buy the index.
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    • FattAgain69
      You can still apply timing the market when buying indices.
      2022-06-25
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  • JonathanRio
    ·2022-06-25
    If you are an investor - use time in the market. If you are a trader - use timing.
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    • nanehz07
      ok
      2022-06-25
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  • limnorth
    ·2022-06-22
    If you need to cut loss when fundamental changes, time in the market can be worse.
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    • FattAgain69
      When fundalmentals have changed for the stocks you are holding, evaluate if you still want to stay in. Rule #1 don't lose money.
      2022-06-25
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  • 苗派
    ·2022-06-21
    🙏🏻🙏🏻 Thanks for sharing & good to know.
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    • weijie123
      Help like and comment
      2022-06-21
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  • cletibals
    ·2022-06-21
    Totally agree, therefore - I do believe that having a proper strategy to get out when the market isn’t healthy makes the most sense (especially in the current environment). Cash is king!
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  • 紘瑀
    ·2022-06-26
    Well wirtten oiece of article. My thoughts are the type of atock in realtion to these strategies plays a part as well.
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  • Bentley HL
    ·2022-06-25
    DCA is not good if you are doing on worst trading days.
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  • schatzy
    ·2022-06-21

    [Thinking] 

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    • Mib1515
      Ok
      2022-06-21
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  • prestomanik
    ·2022-06-21
    DCA in a bear market 🤩
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    • CHOOTC
      ok
      2022-06-21
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  • IDao
    ·2022-06-22
    Agree, DCA is the way!
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  • kiskish
    ·2022-06-21
    thanks for sharing
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  • Anna79
    ·2022-06-21
    Love this piece, thank you!
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  • LCL1
    ·2022-06-21
    Very well written. 👍
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  • MBE
    ·2022-06-21
    What is defined as the worst day? From buyer ir seller perspective?
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  • JeslinToh
    ·2022-06-21
    It all boils down to market. Need to be flexi.
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  • Yyli
    ·2022-06-22

    [Miser] [Miser] [Miser] 

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