Why time in the market is better than timing the market

By October 1, 2021Investments
Woman looking at investment figures on her mobile phone

Since the advent of electronic day trading, it has become increasingly popular among do-it-yourself investors to trade stocks on a short-term basis, hoping it will lead to spectacular returns. But trying to time the market is a risky gamble where the odds are seldom in your favour.

We’ve probably all thought about what life could have been like if we had invested a few thousand pounds the day after the ‘Black Monday’ stock market crash in 1987, or after the global financial crisis in 2008, or even during the lowest point during the COVID-19 pandemic in March of 2020 when stock markets fell heavily due to concerns about the global economy shutting down. These are the kind of hypotheticals that get people excited about the rewards associated with investing, and they are all examples where ‘timing the market’ would have paid off handsomely.


What is ‘timing the market’?

Timing the market is an investing strategy where investors hope to make profits by identifying the best times to buy investments, and the right times to sell them. The most popular advice associated with timing the market is the well-worn catchphrase: “buy low, sell high”. While that advice isn’t wrong exactly, the difficulty with trying to follow it is this: how can you be sure of when prices are low enough to buy, and high enough to sell? The simple answer is you don’t. You can only make a judgement based on your limited knowledge at the time. Just because you think something is priced at its absolute lowest, that doesn’t mean it won’t get any lower. Similarly, plenty of people have sold stocks at a point where they felt their value couldn’t get any higher, only for it to do precisely that.

The other great piece of advice about market timing comes from Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful”. The challenge with this wisdom, of course, is that it’s incredibly hard to do the exact opposite of what everyone else is doing.


Is timing the market achievable?

Cheerleaders for timing the market will tell you that it is possible to forecast the highs and lows of investment markets and that doing so will result in greater investment returns than available through more conservative strategies. However, in our view, timing the market is a risky strategy that leaves investors potentially exposed to volatility and unpredictable events that a more sensible investment approach will navigate relatively easily. At FAS, we work closely with our clients to help them grow their wealth by staying invested in the market, and we discourage our clients from thinking they can simply buy and sell their way towards long-term wealth.


Why is timing the market risky?

One of the biggest downsides to timing the market is that the timing is fiendishly difficult to get right. Getting it wrong means potentially missing out on the days when being invested in the market works firmly in your favour.

One of the most common market timing ‘missteps’ DIY investors often make is to pay attention to negative headlines and sell their equity investments ahead of an expected market ‘correction’ (a correction usually occurs when investments appear overvalued and subsequently fall by more than 10% but less than 20%). But the timing of a correction is never easy to predict. While the investor is sitting on the sidelines waiting for markets to fall, they could be missing out on a period when investments continue to rise.

This market timing error is often compounded by the investor – who has grown increasingly frustrated at missing out on returns – deciding to jump back in and start rebuying equities at the higher prices, only to then suffer even greater losses when the correction occurs. In such instances, staying invested and riding out the correction would have been a wiser, more profitable – and less stressful – course of action!


So what’s the alternative?

In our view, buying and holding a well-diversified collection of investments is a much more effective strategy over the longer term, and the research confirms it. A recent study by investment firm Schroders calculated the benefits of staying invested in the market over long periods, compared with attempting to time the market by dipping in and out. Their research included looking at the performance of the FTSE All-Share and FTSE 250 indices since the beginning of 1986.

If an investor had invested £1,000 evenly across the companies listed on the FTSE 250 back then and held their investment to January 2021 (a 35-year holding period) according to Schroders that grand could have been worth £43,595. Over the same period, if the investor had timed the market, and missed out on the FTSE 250’s best 30 days, Schroders estimated the same initial investment would be worth just £10,627, a shortfall of £32,968 (not adjusted for the effect of investment charges or inflation).

Schroders also revealed that buying £1,000 of FTSE All-Share stocks over the same timeframe would have resulted in the investment increasing in value to £19,452 provided it was held throughout the period. Alternatively, dipping in and out of the market, and missing out on the best 30 days means that £1,000 would only be worth £4,264 some 35 years later.

Of course, no one has a crystal ball that can tell them whether tomorrow will be one of the best days or worst days. And the irony with stock markets is that many of the ‘best’ days in return terms have followed shortly after some of the worst. That’s why the most sensible approach, and to prevent you from missing out on valuable potential returns, is to stay ‘in’ over the longer term, along with reviewing your investments regularly to check on their progress.


Staying the course

So, when it comes to managing your wealth, and investing with the aim of achieving long-term objectives, we think it’s important to take luck out of the equation, and that ‘staying the course’ will give you every chance of success. Choosing to ‘buy and hold’, doesn’t mean ignoring your investments, instead it’s about having a plan and sticking to it, even when things look rocky. The best way to do that is to agree on a long-term financial plan with us, that gets reviewed on a regular basis to ensure it remains on track.


If you are interested in discussing your investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.