As the old saying goes, it’s better to spend time in the market, than trying to time the market. But what does this actually mean?
‘Spending Time in the market’ refers to holding investments throughout all major market fluctuations. As the name suggests, it refers to remaining invested or even further adding to investment portfolios through all market cycles and thereafter holding those portfolios for the long term.
When an individual is ‘trying to time the market’ they are buying and selling shares with the aim of trying to beat the market. What this means is that they try to sell when share prices are at their highest (peak) and buy at their lowest (trough).
As investors do not have crystal balls, trying to buy and sell at exactly the right moment is tough, if not impossible. Take December 2018 as an example. For years leading up to December 2018 almost all commentators suggested that the American stock market was extremely overvalued (at its peak). Then in December, the S&P500, the equivalent of the JSE All-Share in South Africa, fell by 9.18%. Many predicted that it was the start of a crash and moved out of the market. The following year, the S&P500 was up almost 30%!
And herein lies the biggest risk of timing the market; you could end up missing out on the best possible periods to be invested.
Consider the chart below of the S&P500 Total Return Index between 1992 and 2020. What it shows is how an investor would have performed if they had remained invested throughout the period (blue line) compared to if they had missed out on only the 10 best days during that same period (orange line). Trying to time the market and missing out on the 10 best days would have cost almost half the investor’s return!
Stock markets go through cycles. Unfortunately the good times don’t last forever, but fortunately neither do the bad times. What’s important is to remain calm , disciplined and committed to your long term investing goals.
When markets fall, the only time you loose money is when you sell.
*Note: ‘Past performance does not guarantee future results’