Time in the market vs timing the market
If you are an investor, you would know that time is of more value to you when it comes to trading in stocks over anything else. However, for many investors, the difference between time in the market and timing the market is not very clear.
The difference between the two is comparable to that between speculation and investing. Speculation means that you take a bet on the future direction of the market and enter or pull out of the market accordingly. Investing, on the other hand, is a more long-term behavior where you focus on the quality of the asset and hold onto it for a longer time.
Similarly, when you are timing the market, you are speculating and trying to find out the right direction for your trade. But when you focus on the time in the market, you are essentially investing in the quality of the asset and letting the power of compounding work in your favor.
Timing the market
Timing the market means that it is a strategy used to identify the best time to enter the stock market in a particular trade, as well as figuring out the best time to pull your resources out. While some investors seem to be relying on this method of investing in the stock market, it has been associated with several shortcomings, such as:
It is costly
No matter how much someone studies the market, there will always be a variable factor, so if you make the mistake of leaving right before an upwards surge, you will lose out on a significant amount of profit from your investment.
To be able to carefully understand the market timing, you have to continuously keep studying the market. These regular checks can become impractical if you have investments in different stocks in different companies. Secondly, even after regular evaluation, you cannot guarantee the market timings.
Multiple transaction costs
When you keep entering and leaving the market multiple times instead of timing the market, it increases your transaction costs, which eventually could end up costing you a fortune. For those with multiple investments in the stock market, the frequent entry and exit could sometimes take away a part of the profit that they make because of such behavior.
It is because of reasons such as these that the saying time in the market is better than timing the market was developed.
Time in the market
This strategy for investment has been termed to be the Buy and Hold investing strategy as well. The term Buy and Hold does not mean that once you buy a stock in a company, you forget about it or ignore it. It simply means that, in this case, unlike studying the market patterns, the investor studies the share or stock that he is investing in.
The investor, therefore, focuses on buying good-quality stocks and holds onto them for a much longer period of time. Buying a good stock at a fair valuation is always better than buying an average stock at a lower valuation because you can rely on the former for a sufficient return. The principle, therefore, is that the longer you remain invested, the lesser will be the chances for you to lose funds.
Long-term investments tend to show speculative gains along with the consistency that develops owing to staying in the stock market for so long.
Most successful investors conduct thorough research about what they are investing in before making such an investment since their objective is to remain in the market for a longer time. Therefore, time in the market is more important than timing the market.
However, timely checks on the market are important even when you use the time-in-the-market strategy as opposed to the timing-the-market plan.
Thus, this old saying has been seen to hold true even in the midst of a global pandemic and failing economy in several countries. As seen in March 2020, the share market in countries like India, China, or even the US suffered a major hit. The situation was unprecedented and no one anticipated that the Covid-19 outbreak in December 2019 would have such an impact on the world economy.
Thus, investors who were timing the market suffered great losses due to speculative investments. However, with the passage of time, and with most lockdowns being lifted worldwide, the market is again standing on its feet, and it is only the long-term investments that would be able to see the light at the end of the tunnel.
Therefore, it cannot be denied that time in the market beats timing the market given all the variables that are involved in creating a viable stock investment strategy.
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Frequently asked questions
1. What does it mean to time the market?
- It means to anticipate the time at which the market has hit or is about to hit a specific high or low turning point by relying upon historical data, patterns, and technical analysis.
2. Why is time in the market important?
- It is important to be patient in the market since it has been seen that patient investors have the opportunity to grow their investments by holding onto them in the market. This further helps in the long-term growth of the investments.
3. Is it possible to time the stock market?
- Although many investors aim to make decisions based on when the market would hit a particular point, it is practically impossible to be certain about such outcomes.
4. What are the factors to be considered for investment decisions?
There are several factors at play; however, some of the most important ones are:
- Return on investment
- Investment period
- Inflation rate
5. How can one be safe in the stock market?
- The key to being safe in the stock market is to be well informed, researched, and have self-assessment skills. Choose a strategy that can help you in achieving your long-term goals and act wisely when making decisions.