Time in the Market vs Timing the Market

Time in the Market vs Timing the Market


Yes, I know how tired you are of hearing about how your brother-in-law bought Tesla stock right before their blowout quarter in 2020. He timed it perfectly, as he mentions at every family gathering. Now he makes it sound like he has a crystal ball and is able to do that consistently. It’s only natural you want in on some of that, too.

Well, first of all, market timers tell fish tales just as much as any fisherman. Timing the market is impossible to do with any regularity. There’s just too much randomness. Too little signal to too much noise.

But when your company’s 401k representative comes to your workplace to see you every year, “It’s time in the market, not timing the market.” that he always says as he straightens out his coffee stained paisley tie. His strategy of picking some boring old mutual funds and retiring at 65 just does not sound all that appealing.

Let’s break down time in the market versus timing the market by looking at the evidence and coming up with a strategy for both. First, we do have to recognize that timing the market is literally impossible. The day to day moves in the market are tied to a lot of randomness. It simply cannot be done perfectly. Having said that, there are a couple strategies we can employ to increase our odds of success.

When it comes to time in the market, buying a stock or basket of stocks and forgetting about them is no strategy either, although there is virtue and success in holding stocks for the long term. After all, that’s what turned Warren Buffett from an aw-shucks midwesterner working at a feed mill into a centibillionaire.

When holding stocks for the long term, it is imperative to monitor them. At the very least, we recommend setting a Google News alert and tuning into their quarterly earnings report. This will t warn you of any impending Enron-like collapses and also keep you abreast of their general business operations so you know they are growing their profits every quarter just as their CEO said they would.

Once you have a good stock identified as a long term grower, Dollar Cost Averaging is a good strategy to employ. All that means is that you will buy a set amount of stock every month or other set time period. As the stock price fluctuates, you will occasionally get lucky and be able to buy some shares at a discount. You are not trying to time anything, just regularly buying what you know is a long term winner over a long time span. It’s tried and true, stress free, and as close to a guaranteed winning strategy as possible.

Another slightly more sophisticated strategy is called Value Averaging. Here you can start to take advantage of the random fluctuations in the market. Instead of a set dollar amount you put into your stock every month, with Value Averaging, you commit to having your investment grow by a set amount each month.

Let’s say you want your portfolio to grow by 1,000 dollars every month. You start at zero, so the first month you add 1,000 dollars. After the first month, your balance has grown to 1,050 dollars. So the second month you only add 950 dollars to bring your balance up to 2,000.

Now let’s day the market tanks in the second month and your balance drops to 1,900. At the beginning of the third month you would add 1,100 to bring your balance up to 3,000.

After a couple years, there will be instances when your balance will grow by more than $1,000 in a single month. When that happens, you would sell anything over 1,000.

Value Averaging is a great strategy because you are in the market for a long time, but as you see you are also timing the market by buying low and selling high.

We do need to have a conversation about a pure form of timing the market. Many financial advisors and gurus say absolutely do not do it. It can’t be done. Not so fast, let’s come up with a strategy for when to try to time the market.

Timing the market can work for a short term trade, but is crucial to stay disciplined. One of the many problems with market timing is that emotions take over and it’s easy to do something you know you shouldn't do. It’s kind of like that late night slab of cheesecake when you are trying to lose weight. It’s not that you didn’t know you weren’t supposed to eat it, the problem is having the discipline to stay away from it.

When timing the market in the short term, you need a strategy, a plan and the aforementioned discipline. First, pick a stock that you feel the market has undervalued. Many novices stop here and think that’s all it takes. But if a stock is undervalued today, why wouldn’t it be undervalued tomorrow?

The next thing you need is a catalyst. What is the reason you think your undervalued stock will no longer be undervalued by the market in a short period of time from now?

Let’s take an example. Let’s say one of your favorite Silicon Valley tech stocks looks undervalued and you want to flip it for a quick gain. An upcoming catalyst may be that analysts are saying iPhone sales are way up, everyone you know seems to be buying a new iPhone, and Apple’s quarterly earnings report is next week and you predict they report record sales. And since your stock supplies chips for the iPhone, that is the catalyst that will make Wall Street take notice of your stock and send it through the roof.

Now here’s where the discipline part comes in. After the potential catalytic event, in this case Apple’s quarterly report, you have to sell that stock regardless of what happens. Maybe Apple doesn’t report a good number, maybe they do but it still doesn’t move your stock, or hopefully it all goes as planned and your stock pops 8% the next morning. Regardless, don’t let a small loss turn into a big one. Worst case, it’s a short term trade that didn’t work out.

Timing the market versus time in the market. They both can have a place in your portfolio, and each of them takes education, a strategy and the discipline to execute.

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