Time in the market – Not timing the market

An important factor to be weary of in long term investment is not to aim to ‘time’ the market, but to spend ‘time in’ the market.

“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell” – Warren Buffet.

To ‘time’ the market is to attempt to predict short term fluctuations in prices and buy or sell accordingly. A great theory but in practice predicting the market is extremely difficult. Professional analysts whose job it is to identify market opportunities find this very hard, and in fact very few can do it on a regular and consistent basis.

The risk an investor takes in trying to time the market is that if their prediction is incorrect, they will miss a positive return and effectively be on the sidelines watching other investors’ gains.

Another risk effecting perhaps a different style investor is being influenced by negative returns. History is littered with examples of share market tumbles, followed by nervous investors bailing out, only to then miss the eventual, and inevitable recovery.

The following table outlines the scale of the risk investors are taking by trying to time the market.

The annual return from 1979 to 2009 is 12.35% which on an initial investment of $1,000 would have a value of $29,432 at the end of the period. But if you remove the 10 best daily returns over the period it would reduce the annual return to 10.36% which would result in the $1,000 initial investment having a value of $17,614. At the extreme if you were to miss the 50 best daily returns your investment would only be worth $5,404.

The risk an investor takes by trying to time the market is that they miss these positive daily returns.