Timing the market Vs Time in the market

While predicting a stock's future price consists of a lot of uncertainty, studies consistently showed that "market timing" is ineffective, and "time in the market" is more reliable.

What Is Market Timing?

"Market timing" involves purchasing a security with the intention of selling it at a higher price in the short term, driven by the desire to outperform the market. While it may appear similar to the strategy of "buy low, sell high," the inherent uncertainty of the future and the volatility of stock prices make accurately pinpointing the lowest or highest point of a security nearly impossible on a consistent basis.

What Does Time In The Market Mean?

"Time in the market" involves a strategy where investors refrain from attempting to predict the market's lowest or highest points. Instead, they invest with the understanding that timing is likely imperfect, but ultimately, fundamentals outweigh timing considerations. These investors remain committed to the market until either the original reasons for investing shift or they achieve their intended objectives, such as nearing retirement age.

Why Time In the Market Is Better Than Market Timing?

• Stock prices are unpredictable in the short run. While experienced analysts can predict the long-term performance of a stock with a considerable accuracy, The short-term price performance is unpredictable.

• With company stock prices and markets changing a lot every day, market-timers might want to sell their investment too soon to make a small profit or to prevent a loss, even if their reasons for thinking the stock would grow haven't changed. Market timing can trigger emotional responses that overshadow rational and thorough investment analysis. It's crucial to adjust investments if the reasons for believing in a stock change. However, market timing often leads us to exit investments prematurely or remain invested for too long.

• Regularly trading and attempting to time the market can result in high tax and commission expenses, especially for smaller investors, significantly reducing investment returns.

Starting the investment journey requires a clear understanding of your goals and the timeframe for achieving them in your financial plan. Instead of aiming to "beat the market," the focus should be on reaching or surpassing your personal goals. Historically, a diversified portfolio held for several years has demonstrated higher returns compared to frequent market timing attempts to buy low and sell high.