Time in the market more important than timing the market

INVESTING in the stock market is often seen as a game of strategy and timing. Many investors dream of buying low and selling high, aiming to beat the market by jumping in and out at the moments.

However, decades of market data and investor experiences tell a different story: the key to long-term investment success is not in trying to time the market, but in spending time in the market.

This concept, championed by investment legends like Warren Buffett and Jack Bogle, emphasises patience, consistency, and long-term thinking.

The Myth of Market Timing

Market timing involves making buy or sell decisions based on predictions about future market movements. While it sounds appealing in theory, it is extremely difficult to execute consistently in practice.

Even professional investors and hedge fund managers, with access to sophisticated tools and research, often struggle to time the market successfully.

The reason is simple: markets are inherently unpredictable. They are influenced by a wide array of factors - economic indicators, geopolitical events, investor sentiment, and unexpected news - that can cause sudden and sharp changes.

Predicting these events with accuracy and consistency is nearly impossible.

Moreover, successful market timing requires two correct decisions: knowing when to get out of the market and when to get back in.

Getting one of these decisions wrong can significantly reduce returns. Even missing a few of the best-performing days can drastically impact long-term gains.

The Cost of Missing the Best Days

Historical data clearly illustrates the danger of missing just a few of the market's best days.

For example, research shows that if an investor remained fully invested in the 500 from 2003 to 2022, they would have earned an average annual return of around 9.8 per cent.

However, if they missed just the 10 best days during that 20-year period, the return drops to 5.6 per cent.

Missing the 20 best days cuts it to just 2.9 per cent. These best-performing days often occur close to market bottoms - exactly when investors, driven by fear, are most likely to exit the market.

If you're out of the market during these critical moments, you miss the rebound and the compounding growth that follows.

Compound Growth Rewards Patience

Time in the market leverages the power of compounding - the process where gains generate more gains over time.

Albert Einstein famously referred to compound interest as the eighth wonder of the world because of its exponential potential. But compound growth only works if investments are allowed to grow uninterrupted over time.

The longer you stay invested, the more time your money has to grow. Market fluctuations, while inevitable, tend to even out over long periods.

Historically, the stock market has always recovered from crashes and downturns, eventually reaching new highs.

Investors who stayed invested through events like the 2008 financial crisis or the 2020 Covid-19 crash were ultimately rewarded, while those who panicked and sold often locked in losses and missed the rebound.

Emotional Investing is Risky Investing

One of the biggest challenges in timing the market is managing emotions. Fear and greed often drive investment decisions, leading to buying during market highs (due to FOMO - fear of missing out) and selling during lows (due to panic).

This behaviour is counterproductive and can result in buying high and selling low - the exact opposite of a successful strategy.

By focusing on time in the market, investors can reduce the emotional volatility of investing.

A long-term perspective encourages a disciplined approach, helping investors stay focused on their goals rather than reacting to short-term noise.

Dollar-Cost Averaging and Consistency

One practical benefit of time in the market is that it aligns well with consistent investing strategies like dollar-cost averaging. This involves investing a fixed amount of money at regular intervals, regardless of market conditions.

Over time, this strategy reduces the risk of investing a large sum at an inopportune moment and can help smooth out the effects of market volatility.

Dollar-cost averaging also removes the need to "guess" when is the best time to invest.

Instead of trying to time the market, investors commit to a consistent plan that keeps them invested and disciplined.

Real-World Lessons from Legendary Investors

Warren Buffett, one of the most successful investors in history, has famously said, "Our favourite holding period is forever".

He advises against trying to time the market and instead recommends buying shares in fundamentally sound businesses and holding them over the long term.

Jack Bogle, founder of Vanguard and pioneer of index investing, advocated for staying the course with low-cost index funds and emphasised the importance of long-term investing over short-term speculation.

Their advice is grounded in decades of experience and supported by strong empirical evidence: over long periods, the market tends to reward patience and discipline.

Conclusion

In the world of investing, trying to time the market may sound like a strategy for maximizing returns, but in reality, it's a high-risk gamble that few can execute well.

The unpredictable nature of markets, the high cost of missing the best days, and the emotional toll of frequent buying and selling all make market timing an unreliable strategy.

On the other hand, time in the market - staying invested consistently over the long term - harnesses the power of compounding, smooths out volatility, and promotes a disciplined, goal-focused approach.

It may not be flashy, but it is a proven, effective strategy that rewards patience and perseverance. For most investors, the path to long-term success is not in chasing market highs and lows but in trusting the process and staying invested for the journey.

*The writer is a former chief executive officer of Minority Shareholders Watch Group and has over two decades of experience in the Malaysian capital market.