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Why Time in the Market is Always Better than Timing the Market

A perfect stock market investor is the one who can buy a stock at its lowest price level and sell at its highest price level. This perfect investor is a myth. Even one of the greatest long-term investors, Warren Buffet, would not fall under this category. For every successful trade that you make, there is always someone who bought the stock at a price lower than your buy price, and sold the stock at a price higher than yours. It is extremely difficult to time the market consistently over a longer period of time. Some Investment Management experts may manage to do it in the short term. But, that may not be sufficient to achieve the purpose of Investing In Stock Markets.

The potential of stock market investment is to help you generate wealth over a very long period of time. No other investment avenue can help you achieve this goal. So, to fully leverage this potential, you need to be able to hold a stock for at least 7–8 years or more. While purchasing a stock, if you don’t think you would be able to hold it that long, you should not buy it in the first place.

This time period (long-term period) could be different for different individuals. Some may aim for 7–8 years, while others may consider 10–12 years, and a few others may consider 15+ years. While the time period consideration changes, the objective remains the same — generating wealth from the stock market.

In this article, we discuss the reasons for sticking to ‘Time in the Market’ strategy rather than ‘Timing the Market’.

Power of Compounding is Realized in the Long Run

You can generate wealth by leveraging the compounding benefits only over a long-term period. Take an example of Eicher Motors stock. In 2001, the share price of Eicher Motors was around Rs.20. Consider a long-term investor having purchased 1000 shares of Eicher at that price in 2001, for at least 15–18 years. In 2015, the stock price rose to Rs.20,000, generating significant wealth for the long-term investor. Additionally, the investor also earned dividends released by the company a few times during this period.

This was possible only because the investor managed to hold the Eicher Motors stock with patience for 15 years. Stock markets are prone to fluctuations but their unpredictability smoothens out in the long run. Note that we are sitting at all-time high market levels in 2018 — SENSEX has gone from 14,000 levels in 2007 to 37,000 levels in 2018.

Transaction Costs Including Taxes Impact Timing the Market

When you buy or sell any stock, you pay some additional amount including the brokerage, tax, etc. All these add-on costs could impact the profits you can potentially make by timing the market. Instead, when you stay invested for the long run, these costs would be minimal in comparison to the wealth that would potentially be generated.

Chances of Underperforming despite Investments in Quality Stocks

Consider Eicher Motors again. An investor who would have tried to ‘time the market’ could have exited that stock at much lower price levels in 2008–09. In hindsight, the performance of that investor would seem quite poor as compared to the long-term investor who held on till 2015.Consider another example of Reliance Industries. Only those who held on to the stocks from 2012 to 2018 are now reaping significant profits because the major price rise in this stock happened in 2017 and 2018. Till 2016, there was hardly any price rise in Reliance Industries stock.

These two examples clearly show that you may lose out on wealth creation if you try to time the market, instead of spending more time in the market.

From the points discussed here, it is obvious that ‘time in the market’ for a long period scores well against ‘timing the market’. So, aim for the higher goals and let your quality stock investments spend more time in the market.