Which Investing Strategy Will Make You Richer: Time in the Market or Timing the Market?
Written by
John Csiszar
Edited by
Gary Dudak
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One of the longest-running debates in the stock market is whether “timing the market” or “time in the market” will make you richer. While the “timing the market” crowd is perhaps flashier and more exciting, there’s a preponderance of evidence — not to mention testimonies of some of the most successful investors in the world — supporting “time in the market.”
But what do these terms even mean, and what are the real differences? Here’s a deeper look at the debate and its potential ramifications on your portfolio.
What Does ‘Time in the Market’ Mean?
“Time in the market” is an oft-quoted Wall Street expression that refers to staying invested over the long run. The reason for this is multifold, but the primary benefit of having “time in the market” is that you can take advantage of the power of compound interest.
In a nutshell, the earlier you can get invested in the market, the more successful your investment plan will be. Not only that, but you’ll avoid the dangers that come with timing the market.
Both respected academics and famed investors espouse this same philosophy. As Professor Robert Johnson of Heider College of Business at Creighton University told GOBankingRates, “There are two elements for successful retirement planning that there are no substitutes for: time and consistency. The sooner one starts saving for retirement, the more successful they will be. One can’t take a break and time retirement contributions and be successful. Time in the market is much more important than timing the market.”
Then there’s the most famous investor of all time, billionaire CEO Warren Buffett, who isn’t called the “Oracle of Omaha” for nothing. His company Berkshire Hathaway, which is essentially his investment holding company, essentially doubled the return of the S&P 500 index over the 1965 to 2022 period, an outstanding record over such a long period of time.
So what does Buffett have to say about the topic? As he told his shareholders at the Berkshire Hathaway 2022 annual meeting, “We haven’t the faintest idea what the stock market is gonna do when it opens on Monday — we never have. I don’t think we’ve ever made a decision where either one of us has either said or been thinking: ‘We should buy or sell based on what the market is going to do. Or, for that matter, what the economy is going to do.”
What Does ‘Timing the Market’ Mean?
“Timing the market” refers to jumping in and out of the market in search of quick profits based on current market or individual stock trends. The idea behind timing the market is that there are times when it pays to be out of the market, and if you sit on the sidelines when the market (or an individual stock) is going down, you can avoid losses.
Then, when things appear more favorable, you can jump back in, riding the wave back up until it’s time to sell and realize your profits.
Unfortunately, just like its own short-term nature, market timing typically only works over the short run. While some traders have made big profits in a short period of time by timing the market, it’s hard even for professionals to keep up that type of successful record.
In fact, while there are plenty of well-known, successful investors who are quoted as believing in “time in the market,” it’s hard to find a single one who has succeeded over the long run and will go on record as saying “timing the market” is a better system.
How Does Time in the Market Really Work?
The magic of “time in the market” is really shown through representative mathematical examples.
Imagine, for example, that you simply plopped $10,000 into the S&P 500 index on Jan. 1, 2003, and left it there for 20 years, until Dec. 30, 2022. In this real-world example, your $10,000 would grow by more than sixfold, to a total of $64,844. But if you had just the best 10 days over that 10-year period, your returns would have been cut in more than half, to just $29,708, according to Visual Capitalist.
In other words, unless you had been exceptionally lucky with your market-timing strategy, you would likely have missed at least a few of those 10 big days, and your returns would be greatly diminished vs. simply sticking with the market through all of its ups and downs.
The other way to look at “time in the market” is through the magic of compound interest. If you were to contribute $500 per month to an investment returning 10% annually over 30 years, you’d end up with a nest egg of around $1.1 million. But you would have only contributed $180,000 to your account, with over $950,000 of your account value attributed to its growth. It’s hard to generate those types of returns by constantly jumping into and out of the market.
What Are the Pros and Cons of Time in the Market vs. Timing the Market?
Although research is on the side of “time in the market,” there are pros and cons to all investment strategies. Here’s how time in the market looks in terms of pros and cons:
Pros of Time in the Market
- Over time, smooths out market volatility and reduces investment risk
- Allows compound interest to significantly boost gains in later years
- Removes emotion and bad decisions from investments
- Easy to automate and stick to consistent, long-term investment plan
Cons
- May have to wait years or decades for significant gains
- Isn’t a particularly exciting way to invest
- All but eliminates the potential for dramatic, triple-digit gains in a single year
Now, here are the pros and cons of timing the market:
Pros of Timing the Market
- Potential for doubling or tripling your money over a short time period
- Allows you to pick and choose your investment targets based on your own research
- Frees up your money to do other things when it’s not invested in the market
Cons
- High risk for large losses
- Generally a losing game over time, even for professionals
- Can create significant tax liabilities on any profits
The Bottom Line
You’ll have to make your own decisions in terms of an investment strategy according to your financial objectives and risk tolerance. But while timing the market may be more fun, both professionals and academics alike suggest that the key to long-term investment success is time in the market.
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