Time in the Market versus timing the market

Investors would be familiar with this quote “Time in the Market rather than timing the market”. “Time in the Market” is the strategy to hold investments for the long-term while “timing the market” basically means picking at the market prices to buy low, sell high.

Which strategy is more effective for everyday folks like yourself and me?

A simple illustration uses the performance of Overseas Chinese Banking Corporation (OCBC: O39) over the past 19 years – 2000 to 2019. Are you confident on picking the LOWEST price year on year for the best returns, consistently over the past 19 years?

For simplicity, assume Investor A and Investor B buys one unit of share periodically over the span of 19 years. Investor A consistently buys a unit of share every month.

Investor B does perfect timing of the market and buys 12 units of shares on the LOWEST price month for the year. On a yearly basis, each person buys 12 units of shares. Repeating this for the next 19 years, could you guess who fared better and by how much?

The average price of Investor A’s shares is $7.88, while Investor B’s $7.02.

What if Investor B (is a 2nd best investor) and only manages to time the market for the second LOWEST price month for the year.

The average price of Investor A’s shares is $7.88, while Investor B’s is now $7.46.

The above 2 examples of Investor B are extreme examples of the perfect investors.

In reality, an investor will never be able to consistently catch the lowest price. Markets are unpredictable. Human emotions sometimes cloud the mind. What if a relatively savvy Investor B only manages to time the LOWER price month for some years and MID-price month for other years?

The average price of Investor A’s shares is $7.88, while Investor B’s is now $7.76.

The above scenario assumes Investor B is a relatively savvy investor. You see where we are getting at next.

The regular investor like yourself and me might manage to buy in at the LOWER price month for some years and relatively HIGHER price month for other years.

The average price of Investor A’s shares is $7.88, while Investor B’s is now $7.93.

What can we infer from the above? A regular investor would fair better from “Time in the Market” rather than “timing the market”.

Also, when we compare a regular investor against a relatively savvy investor who times the market, the average price difference is a $7.88 versus $7.76. A mere 12 cents gain. Is the higher stress and extra effort worth timing the market? I leave you to decide.

More often than not, investors who time the market are left waiting on the sidelines largely due to human emotions. They watch the share price closely like a hawk and try to contemplate the best time to enter. If price continues to rise, they regret their decision to hold back yet make no attempt to buy. Conversely when price drops, they often remain hesitant to buy.

Timing the market usually involves frequent account activities to capitalise on market movements. The downside to this are the fees – trading commission, brokerage charges, administrative fees, clearing fees and agent fees that one might incur from transactions. As an investor, you should carefully note how costs can erode your investment returns over the long run.

Beyond actual costs, one has to account for other opportunity costs. Investors may face the issue of overspending time worrying and monitoring daily price movements. Developing buyer’s remorse or second guessing your investment decisions is not uncommon.

By “Time in the Market”, you let your investment and profits run while you relax, grab some tea and spend your time – blogging like me. Now it is over to you.

P.S. I have to add on that Dividends gained over the years have not yet been accounted for. “Time in the Market” would have earned ALL dividends over the years. “timing the market” would have caused the investor to have missed out some dividends distribution while he is sitting on the sidelines or unloaded his shares. Are you convinced which is the more effective strategy now? I am.

9 thoughts on “Time in the Market versus timing the market

  1. Would a more realistic (i.e. a strategy investors could actually apply) comparison of timing the market be using a popular technical tool like price crossing and closing above the 200-day moving average to trigger a long entry, and a close below to trigger a short?

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    1. I don’t deny the writing is a little oversimplified. This is to cater to the layman or people who don’t frequent invest or understand about the market.

      Like

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