Time In The Market Over Timing The Market

Updated: Apr 1, 2020

Trying to time the market is statistically proven to be more disadvantageous to investors


Should I Invest My Money Now or Wait

If we had to guess which questions are most frequently asked it would be on when to invest. We think no better words have been spoken than the Oracle of Omaha himself, Warren Buffett, when he said, "The best time to invest was yesterday." It might sound crazy at first (especially during the time of writing were stocks are on a precipitous decline) but history has shown that time and time again not trying to time the market has proven to be more rewarding for investors. This might be so shocking to us, in part, because of the old school adage of, "buy low and sell high" but the facts are here to help.


Often when we are asked about when to invest we like to refer people to a wonderful video produced by Graham Stephen (embedded below). We are unfairly skeptical of financial help types by nature but we believe Graham puts out quality work and has a hard-to-come-by understanding of what opportunity cost is. Graham has become a massive hit on YouTube in the finance community for his real estate investing knowledge and supplements it with credit cards, investing, and other general finance. In his video below he highlights his timeless research on the matter in words we couldn't have said any better ourselves.


The Premise

The Dalbar group does a report every year on the average equity investor versus the S&P500 benchmark and finds that the average investor fails to time the market. In 2018 they found there was a 1.19% under-performance in that year alone and much worse annualized over time. From 1996-2015 the average mutual fund equity investor returned 4.67% annualized vs the 8.19% that the S&P500 returned and if you've read the book "The Little Book of Behavioral Finance" you'll know that it's much worse when you extend the study out further.

This website was made to demonstrate the difficulty of timing the market. The user attempts to buy and sell using actual market data or simulated ones to beat the "buy and hold" mentality. We insist that people try multiple times because sometimes the game can be won by chance but in order for the "timing technique" to be effective it must be consistent. Although we recognize that people won't get all their information that could have swayed them one way or another we could also borrow from the lessons of Fooled by Randomness and suggest that there will be randomness regardless.


The Paradox

Whereas investing in the long-run smooths out a majority of the randomness, the short-term is riddled with it. These spectacular, random, short-term gains often gives investors the impression that they are able to time the market, much more than their human biases originally give them. Therefore, this behavior usually snowballs into further attempts to time the market and has historically yielded dismal results. This is a paradox where good performance actually leads to poor ones!


The Opportunity Cost

One behavioral issue we've observed is that most investors don't benchmark. This technique allows people to better understand their opportunity cost and "prevent further damage" much sooner. The right thing to do becomes much more apparent when the literal math is there to see. For this study, consider comparing yourself to a benchmark would be competing techniques such as "timing the market", "investing immediately", and "dollar-cost averaging" against each other. In addition, we have to include the opportunity costs that are more "grey area" including the difference in decision making time. For instance, dollar-cost averaging is going to be automated and require virtually no time commitment and be the dichotomy of "timing the market" which will ideally require attention to the markets. Furthermore, investors that try to "time the market" will leave their reserves to fallow while waiting for their moment and must be accounted for. In other words, sure, an investment could have made 30% but what if it let cash sit idle when it could have been invested enough to make the difference?


Our Philosophy

There's two principals we apply to our investing approach in this instance. Opportunity Cost and the Velocity of Money. Opportunity Cost says that if we receive an income we need to see *all* available options and be able to chose the best. Say we have accounts that yield 2%, 5%, and 8%. Obviously we decide that we want to move that income into the 8% account. Next, the Velocity of Money says that in order to maximize the benefit of the time value of money we need to move money into this account immediately. So that's what we do. Dollar-cost averaging is another great strategy but we prefer not to use this because how would we possibly know how long to do this for? For example, you receive a $1,200 bonus at work at the end of the year. Do you put $100 per month for the next year? $200 for the next 6 months? $10 a month for 10 years? That being said, dollar cost averaging works better to mitigate your risk in case the stock market declines as soon as you drop that $1,200. But we continue down this back and forth and suggest that for most people who aren't as disciplined the $1,200 that is slowly being put into a fund looks awfully tempting to touch in the process. We could go back and forth forever but our math suggests putting your money to work right away. To wrap things up before we drone on and on, the continual contributions of income as soon as possible additionally have the same effect as what dollar-cost averaging attempts to correct for anyway so it works in our favor.

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Disclosure

As an Amazon Associate I earn from qualifying purchases. I also would never recommend something that I, myself, would not do and can genuinely say that there is great value in these recommendations.

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