Time In The Market vs. Timing the Market

In the world of finance, there's a common debate between "time in the market" and "timing the market".  Time in the market refers to holding investments for the longer term regardless of short-term market fluctuations.  Timing the market refers to making investment decisions by trying to predict short-term market fluctuations.

While timing the market may be tempting, studies suggest that it's next to impossible to predict market movements consistently.  This is true for even the most seasoned professional investors.  Timing the market can frequently result in missed opportunities, reducing your long term investment returns.

A 2021 study from Charles Schwab going back the last 70 years revealed that investors who timed the market perfectly for 20 years in a row would only have marginally more wealth vs. someone who invested their funds immediately or who dollar cost averaged.

Types of Investors

Perfect Timing - $2,000 invested into the market every year at the lowest closing point.

Invest Immediately - $2,000 invested into the market on the first trading day of each year.

Dollar Cost Averaging - $2,000 split into 12 equal portions invested at the beginning of each month.

Bad Timing - $2,000 invested into the market every year at the market peak.

Stay in Cash - $2,000 invested into cash investments (treasury bills) every year.

Source: Schwab Center for Financial Research. Invested $2,000 annually in a hypothetical portfolio that tracks the S&P 500® Index from 2001-2020.

Waiting for the best entry point may not be the best strategy for investors, where the more realistic strategy would be to invest funds immediately. 

It's crucial to keep this information in mind as you work to achieve your financial goals.  By taking advantage of the market's long term-growth, time in the market has proven to be a successful strategy for long-term investing.

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