Time in the Market Beats Timing the Market

“Buy Low, Sell High”. It’s the most universal maxim of investing. But here’s the problem: It is impossible to do consistently. Even with teraflops of supercomputing power and mathematics PhDs working on their secret algorithms, hedge funds haven’t been able to reliably outperform the market average over a long time frame. That’s why, on average, the following statement will always prove to be true:

Time in the Market Beats Timing the Market.

Why? Let’s look at a few reasons why buy-and-hold investing beats trying to buy stocks low and sell stocks high:


We say this over and over, but cost matters in investing. The whole point of active investing is to get rid of funds that are expected to decline in value and buy funds that are expected to increase in value. This lends itself to constantly buying and selling funds, sometimes in very quick succession to attempt to take advantage of market momentum (which can vary widely even within a day). Each of these transactions has a small cost, which adds up pretty quickly with frequent trading. Add to these transaction fees any additional taxes incurred by capital gains from selling investments and the cost of frequent trading starts to have a massive drag on your return on investment.


Returns Are Often Concentrated Over a Short Time

This figure shows the return on investment of the S&P 500 (a broad index of the most important US stocks) from 1996 – 2011 with the top 10 days for a year excluded.

S&P 500 returns from 1996 – 2001. From Schwab Center for Financial Research

If you happened to miss these 10 days, your return for the year would be cut in half! If you miss the top 30 days, you wind up losing money, even in a year when the market as a whole gains 8%. It’s so difficult to predict exactly when the market will have one of its “big days” and time the market to buy right before those big days. And this graph shows that those big days are important in the long-term returns. The only way to know for sure that you’ll catch all those big days is buy-and-hold investing over the long term.



Another of my core principles is that your primitive caveman brain is specially tuned to defeat your attempts at intelligent investing. When you make a spur-of-the-moment investing decision, as market timing often winds up being, you’re exposing yourself to the whole wide world of psychological shortcuts that warp reality and rationality in favor of the powerful neurological fight-or-flight and reward systems, usually without your conscious awareness. You have a chance to get in on this new investment before anyone else does, but you have to act RIGHT NOW! That’s irresistible candy for your caveman brain. By avoiding market-timing strategies and methodically investing with regular, mechanical, buy-and-hold strategies, you are circumventing these heuristics that your caveman brain uses to sabotage your rational decision-making, and enhancing your eventual returns.


The Market Looks Better Over the Long Term

There’s a reason that the stock market generates wealth. It’s because the things that make the economy grow are always there: innovation and technology growth, population growth and workforce productivity, increased automation and efficiency, and increasing capital. The market fluctuates wildly in the short term, but the relentless effect of these factors mean that, on average, the wealth in the stock market will increase and increase. Ignoring the short-term noise and focusing an investment plan to harness the overall long-term plan is the surest way to grow your overall wealth through investing. The longer you stay constantly invested – the more you have time in the market – the more of that natural return you’ll get.

Even the most famous stock-picker of all time, Warren Buffett, believes that the buy-and-hold approach is best for all mortal investors. He famously won a million-dollar bet with a hedge fund manager that he could beat anyone’s returns with a simple index fund over 10 years. He chose the Vanguard S&P 500 Index fund, one of the simplest low-cost index funds in existence, and totally smashed the hedge fund manager on the other side of the bet who was picking stocks and timing the market. Sure, the hedge fund manager had minor victories, including in the depths of the recession, but over time the simpler approach won out, like it always does. Buffett believes in simple buy-and-hold investing with index funds so much that he has said he’ll leave his personal fortune to his wife in the form of an S&P 500 index fund when he dies.


Whatever else you do, remember to stay the course and stick with your plan. Automate your investing whenever possible to remove the chance that your caveman brain will self-sabotage, and keep it simple. You will always come out ahead in the end.


Have you been tempted to time the market and sell your investments when you felt they were right at the top? Buy after a big crash when you were sure they were at the bottom? Do you have different ideas about timing the market?


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