Investors are often drawn to earning big returns in a short period through timing the market, but leaving your investments for the long term could be more sustainable and profitable.
Introduction
Time in the market or timing the market – this is one of investment’s oldest debates with supporters on both sides. There’s the flashy investor who brags about how they earned thousands in a day by buying low and selling high, but also the grey-haired broker whose mantra is “big patience gets you big payments”. Who is right?
Here are three reasons why time in the market may be the better option:
1. A smoother ride
Timing the market can lead to making transactions based on how you feel about your returns rather than solid facts, which can be risky. Investing long-term also smoothens out the short-term volatility that is too often the cause of a hasty decision, and mitigates risk in the long run.
Experts also refrain from timing the market – most consider perfect market timing to be practically impossible, and even the most skilled experts cannot reliably predict market fluctuations.
2. Less stress and hassle
Timing the market requires looking out for windows of opportunity, which means having to be constantly clued into stock prices and ready to make transactions on the fly. This process is a stressful one which takes up a lot of time and effort.
Having to keep track of your investments can also distract you from other daily responsibilities like your work or family – gains from investments may not be worth it if you end up losing out in these other aspects of your life.
Frequent transactions also mean paying more in transaction expenses, like broker fees. This can ultimately erode your overall returns.
Leaving your money long-term, in contrast, can be potentially more hassle-free. Less time is spent tracking your investments, which removes the stress and worry about stock prices and frees up time and energy to pursue other important life goals.
3. Higher compounded returns
When investing, compound interest is what will earn you substantial profits that make up the bulk of your returns. For example, an initial investment of $10,000 with monthly contributions of $500 and an interest rate of just 5 per cent can earn you slightly over $220,000 over the course of 20 years, more than 20 times your initial investment.
By jumping in and out of the market while trying to time it, you may miss out on compound return opportunities, significantly reducing your potential profits.
While timing the market can give you short-term returns, it may be far more volatile and hence difficult to achieve consistent performance. You are likely better off staying invested over a longer period of time to achieve your long-term investment goals.
the bottom line:
Time could be your greatest asset in investing, so staying invested for the long term could be your best option.
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