All mutual fund investors would have come across the saying that time in the market is better than timing the market. But is this true?
Yes, time in the market is 100% better than timing the market for AMCs and distributors. This ensures no break in fees or commissions. But what about investors?
There is a technical answer and a practical answer. The short technical answer is whether staying invested at all times or timing the market is better depends on the sequence of returns one encounters, and there is no way to tell which would be better. Sometimes, time in the market will do well, and sometimes, timing will do well.
Market timing involves additional effort, and this could result in additional mistakes and, therefore, entail additional risks. For example, if I stay invested at all times (easier said than done), I will not miss market rallies. See, for example, A risk in market timing that 122 years of backtesting failed to reveal!
However, that does not mean that staying invested will always work. Sometimes it will, and sometimes it will not, as shown before – Long-term investing in equity has no guarantees of success!
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Both strategies are behaviorally equally difficult to implement because both types of investors (well, most investors) invest without any plan.
Amusingly, “time in the market” is also a form of “timing the market”! Timing the market is similar to how cricket is played. If it is light rain, play continues, but the players return to the pavilion once it gets heavy. Several checks are made on the pitch condition after the rain has stopped, and play resumes only when the conditions are fit for play.
Just as cricketers do not or cannot play in soaking wet conditions, a market timer tries to stay away from the market when it heads south and tries to re-enter only when the sun is out again. I do not claim it is a good analogy, but I hope it gets the point across.
Staying invested is similar to football. We can play football even in fairly bad weather. If it begins to pour, the players keep at it. The “time in the market” investor keeps investing through hard times, waiting for sunshine. Waiting for that big year with bumper returns to change their lives (I am a personal beneficiary of this “strategy”).
If I stay invested, I tell myself, “The stock market cannot remain down forever, so let me wait. If I pull out now, I might miss the recovery. So let me get wet and wait for the sun to come out.
Thus, staying invested is also timing in the market. In a sense, we choose to stay wet and wait for those big returns. Both parties are waiting for those big returns.
The short practical answer is: whether you want to time the market or stay invested, you need a strategy independent of market conditions. You need a balanced and diversified risk-managed portfolio to meet your financial goals. Market timing is an additional layer of effort which is almost always unnecessary. Keeping it simple and focusing time and energy on higher priorities is common sense.