Time in the Market vs. Timing the Market

Time in the Market vs. Timing the Market
September 9, 2013

When it comes to investing in stocks, many investors are afraid of buying at the "highs" so they listen to the so-called "experts" for the right time to get into the market while sitting on their cash in the interim. The fact is that nobody can time the markets consistently. It is time IN the market, rather than market timing, that is the key to long-term investment success.


According to the research firm Dalbar Associates, although the S&P returned over 8% per year over the last two decades, the average investor made only 4%. The reason: trying to time the market. If an investor was lucky enough to have gotten out before a major market decline, he then has to determine when to get back in. Statistically, the odds of both getting out and getting back into the market at the right time are 25%. Who would think about entering a business venture where the probability of failure was 75%? Try to get in and out correctly with two successive times of sale and reentry and the percentage drops in half to 12.5%.


The following was provided to me by Vanguard Funds and illustrates the advantage of time in the market and futility of trying to time the market. If an investor had placed $100,000 in an S&P 500 fund in July, 2007, he would have seen the value fall below $50,000, at the market low, which occurred in March, 2009. By staying the course, he would have been in the market for the rebound; his current value in July, 2013, with dividends reinvested, would be over $131,000! A typical market cycle is five to seven years; if you cannot stay invested for that time, you should not be invested in equities. The key to success in the market is to have an investment plan and stick to it through the market declines. There are no whistles that blow to let you know when the market recovery train is leaving the station.


Market timing can be detrimental to your financial wealth.

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