I believe time in the market, with proper asset allocation, is preferable to "timing the market," which is a fool's game. In my view, time in the market refers to:
- investing early,
- investing often, and
- staying in for the long-term.
Here's a classic example: Which would you rather have -- $1million today or one penny doubled every day for one month? If you chose the penny doubled then you are the "winner" with $5,368,709.12. Time exponentially expands the compounding effect. With less time to invest, even the most skilled traders will find themselves at an enormous disadvantage to compounding interest...
Timing the Market / Investment Outcome:
Since "timing the market" is intended to control the "investment outcome," I combine them into the same points: As for timing the market, of course it is a "controllable" investing variable and it is possible to accomplish successfully but how prudent can it be to attempt when the vast majority of investors are not successful at doing it?
Where investors are commonly misled here is with their own perception of investment gains and "chasing performance."
For example, if you invest $100,000 into a stock and it returns 30% in the first year and loses 10% in the second, is your average return 20 percent? No. After the first year, you'll have $130,000 and after the second, you'll have $117,000 for a total gain of 17% (or roughly 8.5% compounded). If you just earned an "average" 10% per year, you'd have $121,000 at the end of year two.
Now consider that you were the "average" investor and your "friend" earned 30% in the first year. Are you going to hold to your allocation earning "just" 10% or will you be tempted to jump to your friend's "strategy?" Being "average" has its merits...
While anyone can throw darts at a wall and beat the markets over a short period of time, the markets are too efficient to outperform consistently over longer periods time. Investors should not use stocks as short-term investment vehicles, anyway, and any person calling themselves a "financial philosopher" would not partake in such pursuits.
In summary, investing should be a means of making money work for you not a means of making you work for it. As author, Mitch Anthony, puts it, "life is not about making money, money is about making a life."
Now get on with your life...
You may see this blog post and others like it at the Carnival of Financial Planning.
Source:
http://financialphilosopher.typepad.com/thefinancialphilosopher/2007/06/asset-allocatio.html
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