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Timing the market Vs. Time in the market
The pitfalls of thinking you can get in at the perfect time
Dividend Dominator
October 07, 2024
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Happy Monday!
Let’s start the week off strong.
The agenda for today:
👉 Peter Lynch: blessing us with his wisdom
👉 Timing the Market Vs. Time IN the Market: What’s the better strategy?
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"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."
Timing the market Vs. Time in the market
Timing the market refers to buying assets when the price is low and selling them when the price is high.
Buy low, sell high… Am I right?
That’s the goal of every investor that’s ever lived.
But it’s easier said than done.
Trying to time the market can be tempting because of the human desire to make a lot of money and do it fast.
But it doesn’t come without risks and those risks unfortunately far outweigh the benefits.
Here’s why timing the market is a bad investment strategy
Very few people can time the market and even fewer can do it with accuracy.
Why?
Because this strategy is like playing a slot machine. You have to get 3 things right to win:
What to buy
When to get out
When to get back in
And missing out on just one of those 3 things can have a massive impact on your portfolio.
A report from S&P Dow Jones Indices indicated that over a 20 year period ending in 2023, less than 10% of actively managed U.S. stock funds beat the index.
If that’s not enough for you to never try timing the market again, maybe the below will help.
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The Pitfalls of Timing the Market
Mistiming the market by even just a few days can have a drastic impact on your returns.
But staying invested through the highs and lows has generated better returns, especially over a long period of time.
The below chart highlights the impact of missing the best days in the market on a $10,000 portfolio invested in the S&P 500 from January 2003 to December 2022 (10 years).
If you were to miss the 60 best days in the market over that 10 year period, your returns would have been 93% lower than if you stayed invested the entire time.
That’s the difference between $4,205 and $64,844.
Now imagine what that looks like with a $100,000 portfolio.
Here’s what your annual return would be.
If you had stayed invested the entire time, you would have averaged a 9.8% return per year.
If you missed just the 10 best days, your annual return falls to 5.6%.
Missed the 20 best days? Your annual return falls even further to 2.9%.
This image right here is one of the main reasons why I always preach the following:
Not participating in the next bull market will be far more costly than participating in the next bear market.
Tips and Alternatives to Timing the Markets
Diversify Your Portfolio
This means owning a portfolio of different types of assets like stocks, bonds, real estate and cash. It helps you spread your risk across multiple assets.
Dollar-Cost Averaging (DCA)
This strategy doesn’t always produce the best results in the long term but allows you to take advantage of market highs and lows, averaging out your cost basis helping you avoid the desire to try to time the market. Want to learn more about the DCA strategy? Click here.
Keeping a Long Term Mindset
The longer you stay invested, the less of a chance you have of losing money. The market has never failed to recover from a correction or a recession. History proves that although the market can fall, it always comes back… and stronger than before.
See you in the next one!
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— THE DIVIDEND DOMINATOR (@TheAlphaThought)
7:00 PM • Sep 29, 2024
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