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Time in the Market is More Important Than Timing the Market

There are so many different ways to invest in the market. You can be a passive or active investor. You can buy and hold for the long-term. You can also try your hand at timing the market. Buying in and selling out of stocks at just the right time – sounds fun, right? This is more the function of a trader than investor but it draws the interest of so many ‘investors’ even. The ubiquitous ‘studies have shown’ usually agree that it’s better to measure time in the market than timing it.

Timing the Market: A Game of Chance

Market timers usually begin by looking at the chart of a stocks price history. They’ll look at 52-week high’s and low’s, its trading band in a 100 or 200-day moving average and will buy based on what the chart tells them. That’s like looking at the last 100 rolls of the dice at the craps table and predicting what the next roll will be. By entering and exiting the market based on projections, trend analysis, and even gut feelings can prove to be a risky business.

Now, there are reasons to exit out of a stock. If there’s a new threat to their core business, management mismanagement, etc.  These strategic factors that can impact a business should drive that decision. Not what a chart tells you.

Getting in and out of the market, trying to ‘ride the wave’, usually means one thing:  you’re buying high. Then, when the market ‘adjusts’ and prices (but not necessarily values) fall, they’re the first to sell.  The opposite of buying low and selling high.

Missing Dividends

Spending time in the market brings the advantage of dividends. Stocks that pay a dividend have a few important dates:  the record date and ex-dividend date. In order to receive the next dividend, you have to be an owner on the record date (the date the company declares a dividend) and if you bought the stock on the ex-dividend date (or after), you don’t receive the dividend.  The seller does.

So, if you’re trying to time the stock and sell at the wrong time, you’re missing out on one of the benefits of owning stock:  a share of its profits.

Dividends are great in times of a market downturn, too. The same dividend over a lower stock price increases your yield. And many blue-chips will increase their dividend every year and some have done so for decades. The beauty of dividends is you’re still getting paid while waiting for the stock price to rebound.

Stress and Investing

You work hard for your money. Why let your money cause you stress? Because if you constantly check the price of your investments, several times a day, that’s what you’ll be doing:  adding stress.

An investment strategy focused on timing the market is usually more stressful than investing in the market for the long term. When you’re trying to time the market, you have to be tuned into the stock market every day.

Not so when you make an investment in the market for the long term. Short term market gyrations shouldn’t determine whether you buy or sell.

The stress involved in watching the stock market on a daily basis can be significant. Indeed, a timing the market strategy can cast a shadow over a person’ day-to-day life. The associated stress can be significant and negatively impact a person’s quality of life.

Exiting and Never Reentering the Market

I’ve seen investors get so jaded with trying to time the market that they sell everything and sit on the sidelines. They wait for the right ‘signal’ to re-enter and will miss a market rally. Now that it’s too ‘expensive’, they wait and wait and wait.  And many are still waiting.

Sitting in cash is attractive and is appealing for many obvious reasons. Access to cash can result in the funds being spent on something that has nothing to do with investing for the future. A sharp new car can be highly appealing. A fun vacation can be very tempting. Money intended for retirement gets spent elsewhere, harming your future.

For the vast majority of investors, time in the market is far more important than timing the market. Do yourself a favor and invest for the long-term.  Leave the trading to the algorithms. 

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