Investor Advice

Timing the market versus time in the market—debunking the myth. By Dale Gillham

Accepting the mantra that time in the market is more important than timing the market is probably the single greatest downfall of any investor wanting to beat the market average.

The public is often cautioned through advertising slogans about the perils of market timing, but time in the market is probably the most perpetuated myth in the financial planning and managed fund industry.

The reason why we hear the words ‘buy and hold’ or ‘it is time in the share market that yields returns’ is because the industry cannot time the market; the funds are simply too large to manoeuvre with any speed.

A common misconception presented by some in the financial industry to get you to believe that time in the market is more important than timing the market is that ‘market timers’ sell when the market is low and are out of the market when the inevitable rally occurs.

They assert that you run the risk of being out of the market at the trough of a decline, when sentiment is at its most negative and potential returns are at their greatest. They attempt to substantiate this argument by suggesting that if you are out of the market on the 20 biggest days that the market is rising over a 10-year period, your return will fall substantially.

However, the inverse of that argument is that if you are out of the market on the 20 biggest days that the market is falling, it stands to reason that your returns would surpass the market average over any 10-year period.

After all, markets don’t crash up, they crash down.

There are also significant advantages in investing directly, compared to being in a managed fund.

Research has shown managed funds cannot time the market. Instead they ride out the inevitable peaks and troughs in the market in the hope that the compounding effect will increase over the longer term. Meanwhile, your portfolio erodes and you continue to pay annual fees to achieve, at best, average returns.