Learn why staying invested in the market is more effective and reliable than timing the market.
It is important to remember that the market is cyclical, and stocks going down is inevitable, but a downturn is temporary. It’s wiser to think long-term instead of panic selling when stock prices are at their lows.
Long-term investors know that the market and economy will recover eventually, and investors should be positioned for the eventual rebound. When the Covid-19 pandemic hit countries across the globe, the markets dropped like a pack of cards. However, the recovery was swift, and prices eventually returned, albeit at higher levels than pre-Covid times.
Panic sellers might have missed out on the market rise, while long-term investors who remained in the market eventually recovered and fared better over the years. In other words, when stocks are going down, it’s not the time to try and time the market.
When you’re shopping for groceries and other goods, lower prices are generally viewed as a good thing. But with stocks, a plunge in prices sparks the desire to sell instead of buy.
Why is that?
Because when you’re buying milk or bread from the grocery store, choosing a lower-cost item saves you money. In contrast, a falling stock market essentially costs you money in the form of an investment loss, and that’s scary, especially when retirement or other important investment goals are at stake.
However, Until you sell, those losses are called “paper losses,” which means they’re unrealised and impermanent—a stock market recovery can cancel losses and return your portfolio to its original position or even to a better one. If you decide to sell your stocks while the stock market is falling, the losses aren’t just on paper—they’re now a reality.
To add to this, in these restrictive times, there are very few avenues to let off steam. This ensures that our decision-making takes place when we are stressed, which leads to a more short-term frame of reference during the decision-making process. This is what causes a lot of us to bail out nearly almost always at the wrong time.
Why Time in the Market is More than Timing the Market
The most commonly understood way of making money in the market is to buy at the bottom and sell at the top. Let’s explore why this may not be the most optimum way of approaching the markets.
This method involves two extremely tough decisions to be made, and both have to be right for us to make money. Most of us want to get the timing as the upside is huge if we get it right, and more importantly, it involves a lot of decision-making. In tough times like these, we love decision-making because the more decisions we make, the more in control we feel.
Missing the handful of High Return days.
Another way of looking at the power of time in the market over timing the market is to look at what would happen to your returns if you had missed out on the handful of high return days. The results are actually quite surprising.
Let’s analyse data from 3 markets, namely the US, UK and India. Consider the chart below:
The above study was done in the UK markets. This covers the 30-year period from 1986 to 2016 on the FTSE index. If you had invested the money in 1986 in the index and left it at that, an investment of £100,000 would have grown to £1.828 million by 2016. That is an appreciation of 18.28 times in a span of 30 years. Instead, if you had chosen to time the market and missed out on just the 10 best days during these 30 years, your accumulation would have actually halved.
The chart shows the market is a lot more revealing. Over 20 years, between 1996 and 2016, the S&P 500 index has returned 7.68% annualised compounded returns. If you missed the 10 best days, your annualised returns are lower by over 350 basis points. If you missed the 30 best days, your returns are negative.
Nifty, in the last 30 years (10,900 days), has returned a CAGR of 12.2%, which gives us a return of 31 times. If you missed just 30 out of the 10,900 days, your returns came down from 31 times to just 3 times! Data from across the globe points to one thing- how vulnerable returns are to whether you capitalise or miss out on the best days of the market. The near-impossible part is to figure out which are those days; hence spending time is important as these days can happen when you least expect them to!
60% of the best 30 days of returns actually happened in bear markets, which, if we try to time, are most likely to be missed. As one famous investor said, “The most money in equity markets is made when things go from bad to less bad.”
Hence rather than relying on an uncanny sense of timing the market, it is more important to remain invested for a long time in the market.