Time in the market, not market timing, is the more prudent investment strategy to capture market returns. When market volatility is high, market participants often try to predict the highs and lows of the market. After all, who wouldn’t want to time the market to avoid brutal bear market selloffs?
Historically, a buy-and-hold approach has generated higher gains over the long run rather than trying to perfectly time when to enter or exit the market. Think of it this way; market timing implies that an investor can successfully predict market price movements, but no one can predict the market. The key to long-term growth is to be invested in the market over the long run, not by trying to parse the best and worst days.
When markets turn volatile, investors often sell out of the market and wait for the “perfect” time to re-enter the market. Again, trying to time the market seldom yields good results. Investors should also consider the costs they incur when incorrectly timing the market. It’s improbable that an investor would be able to consistently miss the worst days while capturing only the best days. For example, missing several “best days” by being on the sidelines can severely impact portfolio performance. To make matters more complicated, some of the “best days” have occurred during times of extreme market stress. That increases the likelihood of investors missing out on good returns.
Emotions also factor into marketing timing. For example, terms such as FOMO and TINA, as well as the meme stock mania of 2021, exemplify how emotionally charged investors can get when allocating capital – even if those choices resemble nothing more than pure speculation. Research indicates that market timing decisions are often emotionally driven by either fear or greed, exacerbating selling decisions that ultimately erode the returns investors realize over time. The longer the investment horizon, the greater the likelihood of positive returns for investors.