Time in the Market Beats Timing the Market

Many investors respond to the siren song of market timing. After all, who doesn’t like the idea of buying low and selling high? But the reality is far more challenging, and investors who try to time the market consistently can find themselves dashing upon the rocks like the hapless sailors of ancient Greece.

The cost of such a shipwreck isn’t always obvious; it shows up in the critical days of growth you miss by jumping in and out.

That’s why investment lessons like “The stock market is a mechanism for transferring wealth from the impatient to the patient” and “Time in the market beats timing the market” get repeated so often. Because over the long term, the longer you stay invested, the more compounding works in your favor.

The allure of timing the market

You might think of timing the market like trying to catch falling knives. You might get lucky once, but eventually, the game of chance catches up with you. And yet, emotions and biases keep pulling investors back into this game.

Some of those include:

1. Herding Behavior is the tendency to follow what everyone else is doing. Remember the rally in meme stocks? It only took one viral Redditor to rally a crowd of followers into buying shares of a beleaguered video game retailer.
2. Overconfidence is the belief that you can predict market movements better than you actually can — an emotion that can often lead to making risky investments.
3. Relativity is the tendency to compare your situation to others. When it comes to money, this can push investors to make riskier decisions just to keep up with what others appear to be earning or doing.
4. Gambler’s Fallacy is the belief that past market movements influence future independent outcomes. For example, thinking a market is “due” for a rebound just because it has fallen several days in a row. It’s why we often say past performance doesn’t predict future returns.

Acting on these or any other impulses can turn a sound investment plan into a series of emotional, often poorly timed, trades.

Now that doesn’t mean you can’t take an active approach with your money. Just remember that active management takes research, discipline, and conviction — calculated decision after calculated decision — unlike market timers who often jump at gut reactions or market noise.

The cost of missing out

Timing the market can sound good in theory, but in practice, the numbers don’t add up.

Just think about any period of volatility. No one wants to lose money during these ups and downs, so it’s always going to be a temptation to sell until things “normalize.” But that seemingly natural instinct can backfire.

That’s because the stock market’s best days often occur close to its worst days. In fact, between 1995 and 2024, 50% of the best 50 days for the S&P 500 happened during a bear market.¹

And if you missed just a handful of those days, your total returns plummeted. By how much exactly? Well, a separate study found that seven of the S&P 500’s best days between 2004 and 2024 happened within 15 days of one of the market’s worst 10 days. By missing just 10 of those best days while trying to avoid down days, investors would have surrendered almost 4% of average annual returns.²

It may not sound like much, but then you run the numbers.

• Investor A put $10,000 in an S&P 500 index fund at the beginning of 1995 and stayed invested until 2024.
• Investor B started with the same investment but missed the 10 best-performing days during that period.

At the end of the period, Investor A’s initial investment would have grown to $224,279, and Investor B, well, they ended up with 54% less. Had that same jittery investor missed 30 of the market’s best days, their returns would have been about 84% lower than if they had simply stayed invested.¹

The lesson here isn’t that investing is easy. It’s that trying to time the market, in good and bad times, can be a costly decision. Because these price movements are nearly impossible to predict, and when you miss just a few good days, you interrupt the power of long-term compounding.

The power of patience

If timing the market often backfires, the natural question follows: When should you start?

The sooner, the better — so you can begin taking advantage of compounding. Even if you had picked the worst possible day each year to invest, someone who had stayed invested over the past 20 years would still have come out ahead.³ That perseverance improves the odds. History shows that positive outcomes become far more likely as your time horizon and patience expand.

Through 2024, the S&P 500 has experienced plenty of ups and downs, and about 33% of individual years delivered negative returns. Expand the window to three years, and that drops to roughly 11%. Stretch it to 10-year periods, and historically, there were no 10-year periods with negative returns.³

The takeaway

It doesn’t take genius or a preternatural ability to forecast the future to invest successfully. Success demands the conviction to buy and hold investments and the patience to let them grow. So the next time the market feels chaotic, and your resolve starts to weaken, remember why you invested in the first place. You likely chose a long-term approach, and there’s no shortcut to time — except time in the market.

At Motley Fool Asset Management, our philosophy emphasizes time in the market, not timing the market. Because consistently good timing is hard to come by over the long-term. Check out our lineup of funds to see how we bring that philosophy to life.