By now, you’ve probably read many times that time in the market is more important than timing the market.
However, no matter how many times people hear this, some people will still try to time the market anyway – hoping to leverage on price differences that arise due to market corrections/crashes.
In this post, I will share the jarring consequence of timing (or mistiming) the market – and why you absolutely shouldn’t do it.
But first, a short introduction to why time in the market > timing the market.
Impossible To Predict Market Movements
The first reason why timing the market is not a practical strategy is that it is simply impossible to predict market movements accurately.
This is because markets don’t necessarily move logically, and are not representative of economic conditions.
That is, even in poor economic conditions, markets don’t have to be declining – which can be clearly seen based on how markets have been climbing since April 2020, in spite of the Covid-19 situation.
To make things worse, timing the market will only be effective if you can do it accurately twice.
You have to be able to:
- sell your investments before the steep drop
- buy back into the market before it recovers substantially
After all, you will only be able to make profits if you manage to buy in at a lower price than what you sold.
Given the erratic nature of the stock market, trying to time the market – twice – is akin to gambling. You can never be sure that you will win.
Markets Always Go Up
Note: This refers to the market as a whole and not individual stocks.
The next reason is that there is no need to time the markets in order to profit – because markets always trend upwards in the long run.
This can be derived from the theory of business cycles.
Markets are cyclical in nature which results in occasional market crashes but always trend upwards in the end.
So even though you may make some money by successfully timing the market, there’s no need to take that risk because you will still reap long-term returns if you stay invested long enough.
Now, let’s move on to the consequence of mistiming the market.
Missing The Best Days
Nevermind the fact that timing the market is a gamble that brings unnecessary risk to your investment strategy.
If you’re still thinking that it’s a risk you don’t mind taking, hopefully, this point will change your mind.
There have been several reports and articles by the likes of The Motley Fool, CNBC, and Fidelity that say that if you had missed the best few days of the stock market – the days with the largest % gains – your overall returns would decrease drastically.
Take a look at the table below.
|January 4, 1999 to
December 31, 2018
(S&P 500 index)
|Missed 10 best days||$14,895||2.01%|
|Missed 20 best days||$9,359||-0.33%|
|Missed 30 best days||$6,213||-2.35%|
|Missed 40 best days||$4,241||-4.20%|
|Missed 50 best days||$2,985||-5.87%|
|Missed 60 best days||$2,144||-7.41%|
Source: The Motley Fool, originally from JP Morgan.
From the table, missing the 20 best days of the stock market results in a negative annualised return over a 20 year period.
This is extremely significant because it effectively erodes the effect of long-term index investing which is supposed to be the simplest, most effective way to accumulate wealth.
What’s also important to note is that many of such “best days” tend to follow large market corrections/crashes, such as the global financial crisis of 2008 and the Covid-19 crash of March 2020.
This basically means that if you tried to time the market during these periods but mistimed it, you would have missed out on a large portion of returns.
Furthermore, you don’t have to miss many best days to feel the losses in returns – even missing the 10 best days cuts your annualised returns by more than 50%.
Short-Term VS Long-Term Returns
The way I see it, timing the market presents an opportunity to reap short-term returns.
If you’re somehow able to sell your investments and buy them back at a lower price every time, these extra returns can be used to further compound your long-term investments.
However, these short-term returns come with a large amount of risk.
If you’re a long-term investor with a long time horizon for investing, short-term returns are often insignificant when compared to long-term compounded returns.
And as mentioned earlier, it is extremely crucial to be invested in the market on its best days to maximise these long-term returns.
Since you can’t possibly know when the market’s best days will be, the only way to guarantee the best returns is to stay invested – even through the lows.
And that’s exactly what you should be doing if you’re a passive index investor.
Bonus: Reducing Portfolio Volatility
If you want to invest in the market but the thought of seeing your portfolio crash gives you anxiety, you need to accept your risk appetite and find ways to reduce your portfolio’s volatility accordingly.
This ultimately boils down to a trade-off between risk and return.
Generally, more risk is required to achieve higher returns, which results in higher portfolio volatility.
But with proper asset allocation, ie allocating a certain % of your portfolio to different asset classes, returns can be maximised for a given level of risk.
This helps to stabilise your portfolio especially in poor market conditions and could perhaps lead to less temptation to panic sell or time the market during a market crash.
For one, Robo-advisors, which are extremely popular nowadays, tend to suggest portfolios for you based on your risk appetite.
This serves as a guideline for the asset allocation of your portfolio.
In addition, they also tend to perform portfolio re-optimization to adjust your portfolio’s asset allocation based on current market conditions, which are derived via complex algorithms.
This usually includes selling equities and buying bonds in a market downturn and vice versa.
The result is that your portfolio will become more resilient and not suffer such heavy losses in value.
If you’re more of a DIY investor, you can create a portfolio that adopts asset allocations similar to the All Weather Portfolio or the Golden Butterfly Portfolio.
Both of these portfolios are designed to withstand market downturns while still achieving very respectable returns.
This is made possible through the use of various asset classes including equity, fixed income, commodities, and gold.
Understanding your risk appetite and adjusting your portfolio accordingly is vital for long-term investment returns.
There’s no point in holding a high-risk portfolio that achieves high growth one year, but tanks the following year only to have you sell off your investments because you can’t tolerate it.
Slower, sustained growth will beat fast, unsustained growth in the long run with the power of compounding.
Timing the market is not worth it because:
- it’s impossible to accurately predict market movements
- markets always go up in the long run
- you may suffer losses in returns if you miss the market’s best days
Missing as little as 10 of the market’s best days can result in a significant loss in returns.
That, in my opinion, heavily outweighs any short-term returns that could possibly be gained from timing the market.
As a passive index investor, I’m determined to hold on to my investments for the whole ride – through the highs and the lows – and I’m proud that I made it through the March 2020 crash unscathed.
After all, riding the highs feels much better after knowing that I’ve made it through the lows.
If you’re not comfortable with riding through the lows, re-evaluate your risk appetite and choose a portfolio or investment strategy that you will be able to sustain – even through a market crash.
That will help you to accumulate wealth in the long run and be less likely to make mistakes based on emotions.
Have you ever tried to time the market? Will you?
Leave a comment below to share your experience and thoughts!