Time in the Market vs. Timing the Market
Timing the market refers to moving funds in or out of a financial market based on predictive methods. Active investors, who day trade and try to time the market, argue that they can receive additional gain compared to long-term investors. This is due to them making market-timed exits. These exits are not easy, and because of that, many active traders tend to underperform investors who remain invested.
Make the change today, not tomorrow
Timing the market is especially ineffective when investing for the long term. When funding our retirement accounts, we want to put money IN the market consistently. If we have a fixed contribution of $100, then some days, that dollar amount will buy us more and some days less, depending on whether the market is up or down. A bad habit to get into is pulling money out of the market and waiting for the “perfect” time to get back in. This causes you to lose potential gains had you been in the market. Charles Schwab said, “Sometimes my mistake has been hesitancy about acting on the decisions I’ve made. When’s the best time to invest? It’s today, not tomorrow.”
Being in the market often and consistently
William Sharpe, an American economist and Noble Prize winner concluded from his studies that an investor using a market-timing-based strategy would need to be right 74% of the time just to beat the benchmark portfolio of similar risk annually. That is a high mark to meet, especially when dealing with something as unpredictable as the market. If the task of timing the market is challenging for even the brightest of “market-timers,” then we as investors need to stick to our guns of consistently getting in the market. We can invest effectively by diversifying our portfolios and adjusting based on goals, retirement timelines, and life changes.
More time in for more reward
History has shown that the longer the time frame of investments — the higher the chance of a positive outcome. If you look at the past 94 years of the S&P 500 (through Dec. 31, 2022), 94% of 10-year periods have been positive. This number decreases significantly if you look at this over one year. One-year periods have a positive outcome of 73% and a negative of 27%. Fluctuations in the market are a guarantee. The key to success is our time IN the market and not trying to time the market. In the Ramsey Solutions National Study of Millionaires, 3 out of 4 millionaires said that consistently investing leads to success.
Emotions tend to follow suit when the market seems to be going haywire. It is easy to want to pull money out and wait for that “perfect” time to buy in. However, the best time to put money in the market is when you have it. Your investment strategy is based on you and your needs. The best way to meet those needs is with consistency and making intelligent adjustments along the way. If you have questions about what is happening in the market or how it affects your situation, contact one of our advisors to help answer any concerns you may have.