Market Timing Vs Time In The Market

Time in the market is more important than market timing…

While of educated investors already know this thesis, many of them tend to forget how to apply it to their own portfolio on a regular basis. They foolishly try to determine where the market is heading next. As previously mentioned; The longer you stay in the market, the better will become your investment return. But you don’t have to believe me, you only have to be able to read graphs of various financial studies. Let’s start with this one:

Source: Betterment

This graph shows the median cumulative return of the S&P 500 since 1928. It clearly shows that for any inventors who stays invested for more than 5 years, his expected return would dramatically increase year after year. In other words, if you invest, you should keep your money in for more than 5 years. Regardless if you believe in market timing or not, this graph clearly shows that time in the market is part of the successful strategy.

Okay, but how about buying when the market is low and stay the course then? Obviously, most investors will not argue by looking at the above mentioned graph. However, they will come up with the objection that currently, the market is over valued. That currently, this great company is overvalued. They rather wait until the next market drop and then enter for the long haul. Unfortunately, they decide to ignore another brutal graph:

Source: SchwabCenter for Financial Research (Investopedia)

This graph explains that if you miss the 30 top days in any trading years, you will most probably end-up in the red. Why? Because the market is going ups and downs but no one can really know when it will happen. Therefore, those who try to find the great entry point will most probably never find it.

Market timing doesn’t do well for dividend investors

While trying to play the crystal ball reader will not likely work out well, it’s probably even worse if you intend to invest in dividend paying stocks. One of the major advantage of dividend investing is to get paid while you wait. In 2008, your portfolio would have probably show something around -30%, but the dividend payments received throughout the year will more or less be the same than the one in 2007. In fact, the dividend payouts of many companies would increase even during market corrections.