Investing involves placing your hard-earned money in well-run companies to compound over the long term.
However, some investors may feel impatient with a need to see quick profits.
As a result, they start to buy and sell more frequently to try to take advantage of volatility and sharp market movements.
This process, also known as “timing the market”, stands in stark contrast to “time in the market”.
Time in the market refers to patient capital that sits comfortably and slowly grows larger over time.
Timing the market may sound gaudy and appealing, but here’s why you should avoid doing so.
A near-impossible task
If you tried to predict the direction of the market daily, you will realise that these movements are almost entirely random.
On any given day, the market may head either up or down depending on a myriad of factors.
These may include, but are not limited to, macroeconomic events, natural disasters, corporate announcements (such as earnings), news articles, sector updates, and mergers and acquisitions.
In a nutshell, it is nearly impossible to accurately predict short-term market movements as these are also influenced by investor sentiment.
Sentiment, which is based on emotions, can be likened to “animal spirits” in their unpredictability.
Trends can also sometimes reverse suddenly and without warning, causing share prices to either soar or plummet.
There are too many variables at play and it’s tough, if not impossible, to determine how a particular stock will move on any given day.
You will end up wasting significant time trying to discern if the market is heading up, down or staying flat.
This exercise is not just one of futility, but will also prove stressful as you go through a laundry list of reasons for why the market is behaving the way it does.
What is certain, however, is that businesses that are doing well and growing their profits and cash flows should trend higher over time.
Famous investor Warren Buffett says it best when he quips that “When the business does well, the stock will eventually follow”.
Investors need to know that “eventually” may involve anything from a week to several years depending on whether the stock garners sufficient attention.
But what is certain is that a business that grows will always attract a higher share price.
Hence, staying vested in a stock makes sense if you know that the business is steadily improving.
Missing out on dividends
Some investors have the notion that they can time their entry perfectly by selling stocks at a high, then waiting to buy them back again at a cheaper price later.
The problem with this method is that the price may not go down to the level at which you wish to repurchase the stock, leaving you waiting for months or even years.
When you do eventually buy the stock again, you may have missed out on many rounds of attractive dividends.
It also becomes a problem if the stock subsequently soars after you sell it, leaving you high and dry and unwilling to buy it back.
The opportunity cost of not owning a stock that’s doing well can be significant.
You lose out not just on future capital gains but also the accumulated dividends over the years.
Being consistent and spending time and effort
Finally, you need to be consistent to make a decent amount of money through timing the market.
Even if you do get it right once or twice, you may not be able to replicate the feat over many attempts.
In the process, you may spend considerable time and effort in guessing the direction of share prices, which ultimately may prove fruitless.
Remember that constant buying and selling also racks up broker commissions and other fees.
These expenses will erode any profits you make while exacerbating your losses.
It is much easier to stay consistent when you are vested over the long term as you track the progress of the business and there is no need to try to time the market.
Get Smart: Stay vested but monitor your stocks
The verdict is clear.
Timing the market is a fool’s errand because hardly anyone can get it right consistently.
Furthermore, you also use up significant resources, time, and effort but may not see the fruits of your labour.
By staying vested in solid stocks over the long term, you can harness the power of compounding while minimising the fees you incur.
Of course, an important thing to do is to monitor the businesses within your portfolio to ensure that they are still doing fine.
By having time in the market rather than trying to time the market, you will be certain of a much better investment outcome.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
