Is it better to focus on time in the market or timing the market?

Investing in the stock market is often compared to a roller coaster ride – full of ups and downs, twists and turns. Many investors grapple with the decision of when to enter or exit the market, hoping to maximize returns and minimize losses. This dilemma has sparked a timeless debate: Is it better to focus on time in the market or timing the market?

Renowned investor Ken Fisher famously said, "Time in the market, beats timing the market." This statement suggests that staying invested in the market over the long term is more profitable than trying to predict short-term market movements. But is there truth to this claim? Let's delve into historical market data to find out.

Historical Market Performance

To assess the validity of Fisher's statement, we can analyze the performance of the stock market over various time frames, using the S&P 500 as a benchmark. The S&P 500 is a widely used index that tracks the performance of 500 large-cap stocks in the United States.

Long-Term Perspective

Taking a long-term view, historical data shows that the S&P 500 has delivered impressive returns. For instance, if an investor had invested $10,000 in the S&P 500 at the beginning of 1990 and held onto their investment until the end of 2020, their investment would have grown to approximately $180,000. This represents an average annual return of about 10%, despite facing significant market downturns, such as the dot-com bubble and the global financial crisis.

Short-Term Perspective

In contrast, attempting to time the market by predicting short-term fluctuations can be challenging and risky. For example, during the COVID-19 pandemic in 2020, the S&P 500 experienced a sharp decline of approximately 34% from its peak in February to its low in March. Investors who panicked and sold their stocks during this period would have realized significant losses. However, those who remained invested and stayed the course saw their investments recover as the market rebounded.

Real Historical Examples

Let's examine historical events to illustrate the benefits of time in the market over timing the market, incorporating real dollar amounts and percentage moves.

1. The Great Depression (1929-1930s): The stock market crash of 1929 led to a devastating bear market. The Dow Jones Industrial Average (DJIA) lost about 90% of its value from its peak in 1929 to its low in 1932. An investor who put $10,000 into the market before the crash would have seen it shrink to $1,000. However, those who stayed invested eventually saw the market recover. By 1937, the DJIA had more than doubled from its low, and that initial $10,000 investment would have grown to over $22,000.

2. The Dot-Com Bubble (late 1990s to early 2000s): The dot-com bubble saw massive speculation in technology stocks, leading to inflated valuations. The NASDAQ, heavily weighted with tech stocks, soared to over 5,000 in March 2000. However, the bubble burst, and by October 2002, the NASDAQ had plummeted by about 78% to around 1,100. An investor who put $10,000 into the NASDAQ at its peak would have seen it shrink to about $2,200. Yet, by staying invested, that $10,000 would have grown to over $25,000 by 2022 as the NASDAQ recovered and surpassed its previous peak.

3. Global Financial Crisis (2007-2009): The GFC was triggered by the subprime mortgage crisis in the United States. The S&P 500 dropped by approximately 57% from its peak in October 2007 to its low in March 2009. An investor who put $10,000 into the S&P 500 before the crisis would have seen it diminish to about $4,300. Nevertheless, by 2022, that investment would have rebounded to over $25,000 as the market recovered.

4. 2018 Market Correction: In late 2018, the S&P 500 experienced a correction, falling by about 20% from its peak in September to its trough in December. An investor with $10,000 in the S&P 500 before the correction would have seen it decrease to $8,000. However, by 2022, that investment would have grown to over $15,000 as the market bounced back.

5. COVID-19 Pandemic (2020): The pandemic caused significant market volatility. The S&P 500 dropped by approximately 34% from its peak in February to its low in March. An investor with $10,000 in the S&P 500 before the crash would have seen it shrink to about $6,600. By 2022, that investment would have recovered and grown to over $16,000.

Interlinking with the Next Bull Run and Following Crash

Following each market crash, there was a subsequent bull run that led to new market highs. Those who stayed invested during the downturns were able to benefit from the recoveries and subsequent growth. For example, after the GFC, the S&P 500 began a bull run that lasted until 2020, reaching new record highs. However, this was followed by the COVID-19 pandemic, which caused another crash. Once again, the market has rebounded, highlighting the importance of staying invested for the long term despite short-term fluctuations.

Conclusion

While it may be tempting to try to time the market to maximize returns, the evidence suggests that time in the market is a more reliable strategy for long-term investors. By staying invested and riding out short-term fluctuations, investors can benefit from the long-term growth potential of the stock market. As Ken Fisher's quote reminds us, "Time in the market, beats timing the market."

Until next time.

Written by,

Murdoch Gatti

Private Wealth Manager | MComm Fin

IMPORTANT DISCLAIMER

Murdoch Gatti at York Wealth Management Pty Ltd ABN 46 605 610 679 is an Corporate Authorised Representative of Samuel Allgate Investments Pty Ltd AFSL No. 420170; Financial Adviser Authorised Representative Number 001007979.

This article has been prepared without taking into consideration any investor’s financial situations, objectives or needs. Accordingly, before acting on the advice in this article, you should consider its appropriateness to your financial situation, objectives and needs. Every reasonable effort has been made to ensure the information provided is correct, but we cannot make any representation nor warranty as to the accuracy, completeness or currency of that information. The content in this article was originally written by Codie Sanchez and York has incorporated the framework into their investment process. To the extent permissible by law, no responsibility for any errors or misstatements is taken, negligent or otherwise. SAI or its authorised representatives may also receive fees or brokerage from dealing in financial products, see the Financial Services Guide for information about the services offered available at York Wealth Management.