Why Time in the Market Beats Timing the Market?

Given the current volatility of the market, you might be enticed to believe that the only way to make money on the stock market is the WallStreetBets way, i.e. by going YOLO on one stock and creating a very high-risk trading strategy. While it is true that you stand the chance to win very big, but you also stand the chance to lose it all as many on the very same forum can attest to.

So, your friend who tripled his investment on the stocks of Aerotyne international just got lucky, predicting the direction of the market let alone an individual stock is a task which makes the likes of Astrology and Homeopathy look legit.

The only value of stock forecasters is to make fortune tellers look good.

Warren Buffet

So, while researching about the best approach to investing, you must have come across this phrase “Time in the market beats timing the market” or one of its derivatives. But does this claim find its grounds in factual basis? Well, obviously the best strategy for your personal investment depends on your particular goals. However, no matter what your strategy is, if you want to enjoy solid and consistent returns from the market you have to understand this phrase. So, let’s take a deeper dive.

How do you “Time the Market”?

Simply put, timing the market is the practice of a person trying to predict the future stock price of a particular financial instrument. The probability of such predictions has statistically shown to have failed time and over again as indicated by the sharp variation between forecast and actual returns especially in years of demonstrated market volatility such as 2008 and 2015.

Implied Upside S&P 500

The idea of buying a stock when the market is in a dip and selling it shortly afterwards for a profit sounds too good to be true and that’s because it is. You might get lucky with one trade and lose all your profits on the next. This is notwithstanding the fact that timing the market like this with consistency is a matter of utmost impossibility.

Timing the market also often brings unexpected financial repercussions, for instance frequent trading resulting in an increased brokerage commission cost which you have to shell out regardless of your profit or loss situation.

What is Time in the Market?

Unlike timing the market, time in the market refers to the strategy of long term stock holdings instead of short term predictions. This philosophy proves that time and patience when it comes to investing is a virtue of great prominence. Such claims however are properly backed up with market data.

For instance, Nifty 50 which is the benchmark index of Indian stock market and widely regarded as the barometer of Indian economy comprises of 50 large cap or blue chip stocks. If you would have invested just 50,000 in Nifty 15 years ago, today your portfolio would have amounted to upwards of 7 lakh Rupees.

NIFTY Adjusted for Inflation

Dollar Cost Averaging

It is however important to note the concept of Dollar-cost averaging (DCA) as well if you are to properly implement long term investing strategies. In essence DCA refers to the investment doctrine where you divide the principal investment amount across periodic purchases of target asset in effort to reduce the impact volatility has on the overall purchase.

You make the purchases regardless of the asset’s price and at predetermined intervals. Effectively this automates your investment and one common way this is done is by opting for SIPs. This is arguably the best way to build up savings and wealth over a longer time period and completely get done with short-term volatility in the broad equity market.

Reflections

However, you must take note of the fact that this principle is based on the assumption that the market will eventually go through cycles of ups and downs and keep improving over a longer time period. So far, this theory has not been proven. That does not mean there is no risk with such an approach. To be in a position as safe as possible you must diversify your portfolio prudently. In the end, effective money management as I have quoted before, depends heavily on your personal goals and that’s why you must do your own research before investing.

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Sayon Bhattacharya
I am an entrepreneur by profession but a philosopher by passion and I believe my businesses are the perfect playing ground to test the two. Being a student at one of India's premier B-Schools gives me the exposure I need to meet new and exciting people and being an avid finance nerd, I strive to improve myself and make others aware of the need and urgency of financial literacy.
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