Popular opinion would have one believe investing in the market is all about the “risks involved in chasing greater returns.” Most people have heard a friend bragging about buying a stock before it’s share price tripled, but as Warren Buffett once said, “The only value of stock forecasters is to make fortune-tellers look good.” Smart investors know that it is impossible to predict a stock’s outcome. Any stock can result in a potential profit or loss, but the hope of “hitting it big” in the markets has led plenty of investors to try and time the market. When deciding the best approach to investing, it’s often a debate between time in the market versus timing the market. Zoe Financial stresses the importance of investors having a clear idea of their goals, as well as the time frame for their financial plan, before starting the investment process.
Why “Time in the Market” beats “Market Timing”
When attempting to time the market, a stock buyer tries to predict the future market price of a stock. Meanwhile, when an investor invests to grow their wealth in the long term, they buy stocks without trying to guess when the market will be at its lowest and highest point. That brings us to the question of, which one has better results?
What is Timing the Market?
Timing the market involves a person trying to predict the future. There is a high probability of failure with this strategy, though, because no one has a crystal ball. Although it sounds ideal to buy stock and sell it shortly after for a profit, it’s often too good to be true. There are always people who get lucky, but that’s exactly what it is: luck. Not to mention that timing the market with any sort of consistency is nearly impossible. This means that someone may have luck with one stock, but lose it all on the next trade.
Timing the market can also bring unexpected financial repercussions. If working with a broker, frequent trading increases brokerage commission costs. The more stocks bought and sold, the more commission your broker earns. Even worse, the investor has to pay the commission regardless of if they earn a profit or not.
Does Timing the Market Work?
According to Andres Garcia-Amaya, Founder and CEO of Zoe Financial, “While market timing may initially seem to be a variant of the popular saying ‘buy low, sell high,’ the fact that the future is uncertain and that stock prices change rapidly, means that it is basically impossible to accurately and consistently determine when a security has hit its lowest or highest point.” It is financially risky to predict the future, which is why Zoe Financial doesn’t recommend timing the market. In fact, individuals should be cautious of any financial advisor that recommends doing so, as it reflects poor judgment and misaligned interests.
The Secret to Long-term Wealth is Time in the Market
Time in the market, as opposed to timing the market, does not involve short term predictions. This strategy proves that time and patience in the market is better than a quick sale. For example, when a person has a stock for 10 years, the positive effects of compounding and investment growth reap significant rewards. Patient investors gain a larger profit by allowing their investments to grow over time.
The secret to creating long-term wealth is spending time in the market. By doing so, the investor rides out the natural market cycles. For some people, it’s hard to invest that much time in the market, but they should remember how it aligns with their financial goals. Maybe they know that they’ll need the money for retirement or even purchasing a home. By waiting for steady growth over time, smart investors are able to achieve their long-term financial goals, as outlined in their financial plan.
It’s Never Been a Better Time for Financial Advice
For anyone weighing the pros and cons of time in the market vs timing the market, remember that time in the market offers a better outcome, even if it feels overwhelming amid market volatility and financial uncertainty. By investing in stocks with a long-term strategy and a holistic game plan created by a fiduciary financial advisor, you can balance your tolerance for risk with the unique situations in your life.
As Andres Garcia-Amaya states, “You should also consider whether you are expecting any major lifestyle changes, such as starting a family or early retirement, in addition to your time and ability to monitor and manage your stock investment portfolio. When you invest in stocks with a strategy and a plan, you will be better positioned to ride out the inevitable ups and downs that characterize the stock market.” Market volatility can overwhelm some and ultimately reap financial havoc for an investor who is focused on timing the market. Zoe Financial stresses the importance for investors to have a clear idea of their goals, as well as the time frame for their financial plan, before investing.
