Why Time in the Market Is More Important Than Timing the Market

It is said that time in the market beats trying to time the market. Let’s look at why this is true.
Updated April 3, 2023
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time in the market beats timing the market

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There is a saying that time in the market is more important than timing the market. This refers to a simple investment strategy that focuses on long-term goals. The benefits of being a long-term stock investor may outweigh the short-term gains of getting in and out of the stock market quickly by timing the movement of individual stocks and the markets.

This might be an important concept for all investors alike. But why does time in the market beat timing the market? Let’s begin by understanding the methodology of each strategy.

In this article

What is time in the market?

Time in the market refers to an investor’s holding period of stocks, mutual funds, exchange-traded funds (ETFs), and other investments. This is a strategy that billionaire Warren Buffett often supports. Time in the market could be days, weeks, months, years, or any other time period. However, when compared with market timing, time in the market generally denotes a longer-term investor.

For long-term investors, time in the market could be decades. For example, a 25-year-old investor just starting out might be invested in the market for 40 years until retirement. They might even continue to be invested in the market well into their retirement.

Time in the market should not be confused with buying and holding a specific asset for a long time. Long-term investors could and often do make changes in their portfolios from time to time with the goal of rebalancing their investment.

This might entail periodic shifting of holdings to ensure their investment allocation remains in line with their overall investment strategy. It might also entail selling asset classes that no longer fit their strategy or one whose performance doesn’t meet the investor’s performance criteria. Investors might also decide to put new money to work in a new holding that fits their overall investing strategy.

That’s why time in the market means an investor would buy and hold their various assets over the long term, with occasional rebalancing here and there. This is in contrast with trying to strategically decide when to enter the markets and when to have their money on the sidelines.

What is market timing?

Market timing is when an investor tries to time the price movements of a particular security. They may feel that the price of a particular stock is unusually low and decide to buy that stock. They may wait until the stock increases in price and then sell it to make a profit. The goal of such a strategy is to use perfect timing of market highs and lows to achieve an annual return higher than the average market.

On a broader scale, market timing refers to the strategy used by investors who strategically decide when they will be invested in the market and when they will get out. For some investors, these decisions might be based on their own views. Others may depend on past performance data or analytical forecasts.

Why time in the market beats timing the market

For the average investor, time in the market may beat timing the market. Here are some of the reasons this may prove ‌true:

1. Avoids emotional investing

It's easy to let emotions get in the way when investing your savings. Seeing the stock market drop due to unexpected political events or a sudden wave of restrictions may be difficult to process emotionally.

In such situations, your inclination as an investor might be to sell some or all of your investments to avoid losing more money. Maybe you are close to or in retirement and can’t take in such losses. Or perhaps you’re a new investor and you feel uncertain about what to do when the stock market crashes.

The problem with selling out during a market downturn is that you often book losses, or at least lower returns. Once you sell, your money would sit in cash form. What should you do next? When do you get back in the market?

One example is the aftermath of the 2008 market crash when the bear market associated with the Great Recession dominated most U.S. stock prices. There were many stories in the press at the time about investors who sold off their assets out of fear of severe market volatility. However, some of these investors found themselves on the sidelines as the market rallied in early 2009.

Selling their assets solidified the steep losses they had. It also forced them to miss out on the market recovery. In some cases, investors who sold their assets during the crash had to work longer to make up for the severe drop in their portfolios.

2. Saves money

This might not be as prevalent as it was in the past, but frequent traders who time the market may find themselves incurring high levels of transaction fees from this trading activity. The reason this might not be as prevalent as in previous years is that many online brokerages offer low- or no-cost trading.

Another cost that market timers may incur is capital gains taxes. Although selling at a profit is better than selling at a loss, frequent traders will often incur short-term capital gains on securities held for less than one year. Short-term capital gains are taxed at the investor’s ordinary income tax rate, as opposed to the generally more preferable long-term capital gains tax rate.

3. Buy-and-hold strategies tends to work better

There has been extensive research on average stock market returns. This research reveals the value of time in the market versus the cost of being out of the market for just a few of the best days over a period of time.

One study looked at the cost of a hypothetical investor missing the 10, 20, 30, and 40 best-performing days in the market. The study covered the period between Jan. 1, 2009 to Dec. 31, 2018.

In the study, the hypothetical investor invested $1,000 in the S&P 500 index at the start of the period. The results are eye-opening:

  • If the investor left the money invested for the entire period, their initial $1,000 investment would have grown to a value of $2,775.
  • If the investor had missed only the 10 best days of the 10-year period, their initial investment would increase to $1,722 at the end of the 10-year period. This is only 62% of what their investment would have been valued at if they had not missed these 10 best days.
  • If the investor had missed only the 20 best days of the 10-year period, their initial investment would increase to $1,228 at the end of the 10-year period. This is only 44% of what their investment would have been valued at if they had not missed these 20 best days.
  • If the investor had missed only the 30 best days of the 10-year period, their initial investment would decrease to $918 at the end of the 10-year period. This represents a decline of 8% in the value of their initial investment after missing the 30 best days of this 10-year period.
  • If the investor had missed only the 40 best days of the 10-year period, their initial investment would drop to $712 at the end of the 10-year period. This represents a decline of almost 29% in the value of their initial investment after they miss the 40 best days of this 10-year period.

Although the S&P 500 index is not investable on its own, there are several index mutual funds and ETFs that replicate the index. An investor who had their money in one of these index funds or ETFs is likely to see a similar performance.

There are numerous versions of this study and other similar studies that were conducted over the years. They reinforce the idea that time in the market is important and trying to time the market could be detrimental to your returns.


What are the benefits of having time in the market?

One of the main benefits of time in the market is that it allows your holdings to compound over time to improve future returns. This, in part, is based on the idea that the stock market tends to move higher over longer periods of time.

This strategy is not a guarantee of future results, but many financial advisors may support it. Asset management firms might often use such a strategy when making their investment decisions.

What’s the difference between time in the market and timing the market?

Time in the market means staying invested for the long term, whereas timing the market usually refers to shorter investment periods.

Time in the market doesn’t mean an investor should never change their asset allocation, but ‌that they would carefully consider selling any of their assets.

There may be times when it’s better to sell an asset or when the investor has more money to invest, so they might consider adding a new asset. Investors will also generally want to rebalance their portfolios on a regular basis to ensure their investment is in line with their investment strategy.

Timing the market refers to an investment strategy that entails getting into and out of the market at certain times. The goal of timing the market is to beat the average market performance.

Why is timing the market bad?

Although timing the market is not specifically bad, trying to time the market might be costly for some investors. It might require a lot of research and effort to perform it successfully. This is why portfolio management companies and professionals may struggle to time the market successfully on a regular basis.

Someone who invests their money but doesn’t monitor the markets and individual assets on a daily basis might find themselves in a losing position more often than not. In some cases, it could be tough to keep your emotions out of the investment process.

Bottom line

There is no one right investing style or investment strategy. However, for most investors, time in the market might prove to be a simpler strategy than trying to time the market on a regular basis. Market timing may require extensive research and monitoring of market activity on a daily basis.

Many studies have shown that time in the market tends to pay off for investors over the long haul. Whether your goal is simply to build wealth, save for retirement, or some other goal, time in the market could be one of the best tools at your disposal.

When you’re investing money, it could be important to review your financial planning goals and choose an investment strategy you are comfortable with. If you need help, be sure to consult with a financial advisor.

FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.

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Author Details

Roger Wohlner In addition to his bylined articles on sites like TheStreet, ThinkAdvisor, and Investopedia, Roger ghostwrites extensively for financial advisors, investment managers, and financial services companies.

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