The case for “time in” the market

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.

There is a famous adage: “Time in the market is better than timing the markets.” Yet, what does this mean? Is it true, and if so, why do investors still attempt the latter approach? Below, our Grantham financial advisers make the case for “time in” the markets. We hope these insights are useful. To discuss your own investments or financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:

01476 855 585
info@casfin.co.uk

Timing versus “time in”

Market timing (or “timing the markets”) is when an investor buys or sells investments based on market price movements. If he expects a stock to fall imminently, he will seek to avoid losses by selling; or, seek to profit by taking a short-selling position. If he believes the stock will rise, he will buy more to “ride” the price increase.

The idea sounds attractive, and much of the investment industry (e.g. day trading) is built upon the belief that it can be done. However, the probability of success is very low. Picking winning funds is difficult with layman’s knowledge. Individual investors do not have the time, experience and skills of professional fund managers.

“Time in the markets” is an approach that accepts that markets are largely efficient. Prices largely reflect publicly available information. This makes it difficult (nearly impossible?) for individual investors to gain an “edge” over everyone else when predicting prices.

By the time you think you have spotted something, almost certainly, most others have done so too! As such, it is more important to discern the fundamentals of an investment rather than trying to predict market events (which are influenced by countless variables outside of sight).

Market timing: anecdotes of the risks

Trying to time the market usually involves holding some of your capital back from markets (in cash) as you wait for the “right” moment to jump in. However, this involves a “hidden” opportunity cost, which often exceeds the benefit even of “perfect timing”.

One research paper by Schwab illustrates this with an example of five different investors. Each investor takes a different approach to when (and how often) they invest. One person does not invest at all, keeping their money in cash.

Interestingly, all of the investors who invested over 20 years – whether as a lump sum or as separate monthly investments – did remarkably well. However, the person who held their money in cash experienced only a third of the investment growth enjoyed by the other investors.

There are some important lessons here. Firstly, cash is a poor asset class for long-term growth. Whilst it may appear “risk-free” due to the lack of price movements on a stock exchange, low interest rates and inflation will inhibit the investor’s goals. Cash is typically useful for specific financial goals – e.g., improving diversification or storing an emergency fund.

The third lesson stresses the importance of taking a long-term approach to investing. Timing the markets lends itself to a short-term mindset due to the focus on the minutiae of immediate price movements. By contrast, “time in” the markets focuses on joining the markets on their long-term trajectory towards growth despite the short-term fluctuations that occur along the way.

Develop an investor mindset

Timing the markets can be an emotionally challenging experience. It is often distressing for investors (traders?) to see an investment suddenly fall unexpectedly in price. This can lead to impulsive decision-making, such as “panic selling” shares due to a “loss aversion” reaction.

However, the long-term investor accepts their portfolio will rise and fall along their investment journey. Their mindset is disciplined and focused, and they trust the strategy agreed with their financial adviser. Market “crashes” and turbulence are expected and accounted for ahead of time, reflected in the investor’s chosen asset allocation.

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585
info@casfin.co.uk

Reference:

Schwab Center for Financial Research (2023) Does Market Timing Work? Available at https://www.schwab.com/learn/story/does-market-timing-work (Accessed 09/10/2024)