Focus more on time in market than timing the market

We have observed that trying trade timing or market timing in trading activity is quite difficult and may not result in profits consistently. In fact, buying low and selling is more likely to work in theory than in practice. As the old market wisdom goes, we must focus more on time in the market than timing the market. How do we understand the difference between time and timing? Let us begin by looking at the difference between speculating and investing. In Speculation, we take a bet on the future direction of the market and position trades accordingly. On the other hand, investing is all about focusing on the quality of the asset and holding on to it for the longer term. That is also the difference between timing the market and time in the market. When you try timing the market you are effectively speculating on the market direction. The problem is that you don’t have control over factors like elections, Fed rate changes, RBI announcements, etc. 

Instead, when you focus on time in the market it is more like investing where you let the quality of the asset and the power of compounding work in your favour. We also need to understand empirically why trying to time the market rarely works in practice. Instead of putting your efforts on timing the market, spend more time understanding the equity stock you are investing in and take a longer-term perspective.

One thing is clear that trying to consistently time the market is neither feasible nor really worth the effort. Here is why time beats timing when it comes to sustainable returns.


• In the short run, the stock market is a slotting machine but in the long run, it is a weighing machine. Quality stocks tend to outperform any kind of aggressive strategy over a longer period of time. The vagaries of the markets tend to get smoothened.


• Timing the market has a cost in terms of transaction costs and taxes. Transaction costs refer to brokerage, statutory costs, taxes, exit loads in case of mutual funds, etc. Then you have your tax commitment of LTCG versus STCG. It really does not add up!


• As we saw in the charts above, timing the market is vulnerable to a handful of good or bad days. Over 10-15 years, markets will either spurt sharply or correct sharply. In the process of timing the market if you miss out on these good days. Leave it to time! 


• Timing the market often becomes self-defeating as you get carried away by the media hype. Generally, there is hysteria around bullish stocks which may not really translate into returns. That hysteria may just end up hurting your portfolio.


• Time in the market gives a bird’s eye perspective. While timing the market you tend to get involved in the market vagaries. Time is about waiting and buying when valuations are attractive. This perspective works in favour of time in the market over timing.