"Time in the Market" versus "Timing the Market"

The best time to buy shares is not about timing the market but rather about time in the market.

Many people who decide they need shares as part of their investment portfolio often hesitate when it comes to actually buying the shares; usually because they're not sure if it is the best time to buy or they feel they still have a lot to learn about the sharemarket.

The best time to buy shares is not about timing the market but rather about time in the market.  No one, not even the famous sharemarket guru and one of the world's richest people, Warren Buffett, knows whether a particular share or the market as a whole will rise or fall in the near future.  What he does know is that it will rise AND fall, and that short-term volatility does not matter as long as it rises over the medium to long term.  

You can learn about the sharemarket by observing and keeping an eye on how your shares perform under different market conditions.



Long term investors aim to capture an upward trend in market value.



Short term investors try to capture value from the volatility in the sharemarket.

"Time in the Market" versus "Timing the Market"

Historical Stock Market Performance

Time In the Market and Timing the Market

Time In The Market:

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.

Albert Einstein called compounding interest "the most powerful force in the universe" and it represents "time in the market" at its best.

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