Timing the market vs Time in the market What works better 1


There is a wide diversity among the participants in the stock markets. Everyone has his/her own set of beliefs and theories. When categorised on a broader scale, there are two major sets of people–one who believe in timing the markets while the others who stick for a long time in the markets. Even though both the strategies have time at their core, the actual approach is poles apart. One relies on gaining from short-term market movements while the other depends on long term wealth generation opportunities offered by the financial markets.

What is timing the markets?

The proponents of timing the markets believe that identifying short term trends and buying and selling in accordance with the trends can be a successful investing strategy. The market-timing approach depends on the successful prediction of the rise and fall of the markets. Technical charts and analytics tools can help in predicting short term movements of the markets to an extent. However, even the best of analytics tools cannot predict the impact of sudden developments. Timing the markets requires selling at the highs and buying at the lows. To time the market, you will have to be successful in two instances, which is not always possible. It has been observed that stock markets generate the maximum quantum of returns in a few days. Timing the markets can lead to handsome gains sometimes, but the chances of missing the rally will always be high. The biggest risk in timing the markets is missing the market surge.

Time in the market

Spending time in the market is a strategy exactly opposite to timing the markets. It requires a long term investment horizon. Markets witness bullish and bearish cycles at regular intervals. Investing for the long term nullifies the effects of periodic bullish and bearish cycles. The advantages of long term investment will be clear if you take into account Nifty returns. The benchmark index has multiplied investor wealth by 31 times in the last 30 years. However, the bulk of the returns were generated in just 30 days during the period. If you were not invested during those 30 days, the returns would be just 3 times the initial investment. It is humanely not possible to predict the exact 30 days of high returns over 30 years, so, when you remain invested for the long term, the investment multiplies despite multiple declines during the period.

Conclusion

The relevance of timing the markets, as well as time in the markets, is the proof of their success. The difference is timing the markets may have been fruitful for certain people but is likely to be counterproductive for common investors. On the other hand, spending time in the market or long term investment offers a high chance of adequate returns for investors. Moreover, staying invested for the long term results in a compounding of the invested amount, leading to higher returns.