The popular saying is “It’s not timing the market, it’s time in the market.” The saying is meant to say that the amount of time spent invested plays more of an impact than trying to time the market. I agree–mostly. Where I disagree is how this phrase seems to dismiss timing the market altogether. The belief around finance is that you’re guaranteed a 8-10% return if you put your money into the stock market right now. I believe that will be true…eventually.
But when is important and should not be ignored.
Timing the Market
For ease of comparison, dividend yields are not included in the returns below.
The S&P 500 closed at $676 on March 9, 2009. It closed on February 12, 2021 at $3,935 for a 15.9% annualized gain. That’s one hell of a return over a 12 year period.
Of course, this is cherry picking the data. What if we cherry pick the opposite way?
The S&P 500 peaked on May 19, 2008 at $1,565 before the downfall began. The stock market eventually recovered until the COVID-19 pandemic came around. On March 23, 2020, 12 years after the 2008 peak, the S&P 500 bottomed out at $2,237 for a 2.9% annualized return.
Yes, these are extremes, but they are far from the most extreme cases. Say you started investing on March 23, 2000 when the S&P 500 was $1,527. If you put your money in a S&P 500 index fund on this date, you would realize a 1.9% annualized return when the bottom hit in 2020–almost exactly 20 years later.
With ranges this large, it’s impossible to say that timing doesn’t matter.
The Common Argument
Proponents of “time in market” will tell you that by sitting on the sidelines, you run the risk of missing some of the biggest positive returns. Very true, but you also miss the biggest negative returns.
Which one has the greatest effect?
To ensure that our data is relatively all-encompassing, let’s set our start date at August 12, 1982. This is the day that the S&P 500 hit a bottom after the energy crisis of the late 1970s. The S&P 500 closed at $102.
Last week (March 5, 2021) closed at $3,842. Since our start date, the S&P 500 had an annual return of 9.8% for a total return of 3,651.2%.
Since then, here are the top 5 daily gains in this period:
| Top Gains |
| 11.58% |
| 10.79% |
| 9.38% |
| 9.29% |
| 9.10% |
Seeing as how our annual return averages near 10%, these daily gains are very substantial. If you removed these outsized gains from your total return, you’d end up with only $2,383 (compared to $3,842). That’s an average return of 8.5% and a total return of 2,226.7%. Our balance is only 62% of the base case.
“Time in market” proponents love this argument. They will use it to justify their position.
But what if we flip it on it’s head and remove the worst daily losses during this period?
| Top Losses |
| -20.47% |
| -11.98% |
| -9.51% |
| -9.04% |
| -8.93% |
If we removed the worst 5 days, we end up with $7,322 instead of $3,842. That brings our average yearly return to 11.7% with a total return of 7,048.7%. Our new balance is 1.9 times what the original balance was.
If removing the top 5 gains was evidence against timing the market, surely removing the top 5 losses could be evidence in favor of timing the market.
Not quite
Despite the large ranges of the highs and lows, the important piece of information is that your money increased in all three scenarios. When your money is in the stock market, your portfolio will likely increase given enough time.
That was using the bottom of 1982 as the start date. If we use the peak of 2000 instead, we start at 4.5%. If we remove the top 5 losses, we get a 7.1% return. Even when we remove the top 5 gains, we’re still at 2.2%.
By investing in the stock market, you end up in a better place than where you started.
If you’re not in the market at all, you get 0.0%. You only win when you play the game.
Conclusion
Perhaps the most interesting piece of evidence to the “time in” market stance lies in the structure of our markets. When stocks fall too fast, the market stops.
These are called “circuit breakers.”
No such mechanism exists when the market rises too fast. This means that the downside is protected while the upside is unlimited. The game is rigged in your favor.
And while timing the market can be a tough game to play, timing the purchase and sale of individual stocks is crucial. When you’re an active investor–and especially if you’re a value investor–the price you pay for a stock can make or break your returns.
We can go back and forth all day cherry-picking data, but the correct answer is this: timing the market and time in the market both matter, but when in doubt, invest.
Thanks for reading!
Featured photo source: Veri Ivanova on Unsplash
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