“Time in the market beats timing the market” is an old investing adage that speaks to the importance of staying invested for the long term, rather than trying to predict when’s best to buy or sell – particularly in times of market volatility.
Although perfectly timing your entry into or exit from the market – “buying low and selling high” – can potentially lead to attractive returns, the chances of doing so successfully are slim.
In practice, attempting to time the market often leads to missed opportunities to recover and increased risk, making it a less reliable strategy for long-term success when compared to keeping your money invested. This is because stock markets are unpredictable in the short term. However, over the long term, markets have historically trended toward steady growth, rewarding patience and resilience over knee-jerk reactions or attempts to outsmart others.
That’s why prioritising time in the market rather than timing the market can help ensure you capture consistent and steady growth over time.
Read on to find out the potential benefits of long-term investing and why “time in the market beats timing the market”.
Exiting the market during downturns has historically been a less effective recovery strategy than remaining invested
During times of market volatility or downturns, you might see your portfolio’s value fall, which could tempt you to exit the market to try and prevent further losses.
However, a drop in your portfolio’s value remains a paper loss unless you sell. Indeed, by staying invested, you give your portfolio a better chance to recover, as markets have historically rebounded and trended towards growth in the long term.
The graph below shows how average returns on the US S&P 500 index turned negative during various global crises since 1987, only to experience significant rebounds within the following 12 months.
Source: Forbes
If, for example, you had exited the market during the pandemic in 2020, as returns fell by more than 30%, you would have missed the chance to recover your losses and benefit from 77.8% growth the following year.
Moreover, while shifting to cash might seem like a safer option, it can be costly in the long run. Inflation tends to erode the real value of cash over time, and unlike investments, cash typically lacks the growth potential that markets can offer, leaving you at risk of losing purchasing power.
So, while market downturns often accompany major global events, history demonstrates that these declines are usually temporary and are often followed by a considerable rebound as investor confidence is restored.
Attempting to "time the market" by jumping on trends is rarely an effective strategy for achieving long-term investment success
Beyond the temptation to exit during downturns, you might also feel inclined to time your entry into the market by chasing the latest high-performing stock.
Although such investments can be enticing, following the herd toward the current trend is rarely an effective or safe strategy for achieving long-term success.
A study reported adviser-hub found that in 12 of the 18 years between 2005 and 2022 (inclusive), not a single US stock that was among the top 10 performers in one year also made the top 10 in the next.
Plus, in five of the six years in which a top 10 performer made the list in the following year, only one company managed it, and in the other year, three did – as you can see in the graph below.
Source: Adviser-hub
And it’s not just that these companies experience success only to slightly drop off later, as the decline in performance was often significant.
The graph below shows the number of S&P 500 companies that were in the top 100 one year and also the next.
Source: Adviser-hub
Based on the above data, on average, only 15 companies managed to remain in the top 100 from one year to the next, highlighting the considerable volatility and unpredictability of market performance.
And these trends aren’t limited to the US. The study found that in Japan and the UK, the average top 10 performer fell to the bottom half of the performance rankings in 11 out of 18 years. In Germany, this pattern was even more pronounced, occurring in 14 out of 18 years.
So, the study clearly reveals that past performance is not a reliable indicator of future results, and that attempting to time the market by chasing past or current “winners” is not a stable path to success.
Diversification can help your investments weather market fluctuations and provide wider opportunities for returns over time
As you’ve seen above, history consistently shows that exiting during downturns or trying to capture the gains of a rising stock is rarely an effective investment approach and often comes with more risk.
Yet, there is a strategy that can help you minimise your losses amid market dips and capitalise on the returns of wider markets: portfolio diversification.
By spreading your investments across a range of assets, industries, and regions, you reduce the impact of poor performance in any single area. So, in a market downturn, your investments may be better protected as gains or stability in one sector can offset losses in another.
Diversification also positions your portfolio to capture wider growth opportunities, helping to enable a steadier progression towards your long-term financial goals.
For instance, the table below shows the performance of global indices between 2013 and 2024.
Source: JP Morgan
As you can see, in 2020, the first year of the pandemic, the UK’s FTSE All-Share index declined by 9.8%. If you had significant investments in the UK market, you might have been tempted to exit and cut your losses. However, in 2021, the FTSE rebounded with an 18.3% gain.
In contrast, the MSCI Asia ex-Japan index surged by 25.4% in 2020. During the UK downturn, this performance might have persuaded you to invest in the Asian index. However, the following year saw a decline of 4.5%.
In both cases, having a portfolio that was spread across the regions could have mitigated the effect of these fluctuations. This approach supports maintaining discipline and staying focused on long-term growth, rather than reacting to short-term market trends.
So, alongside prioritising time in the market over timing the market, portfolio diversification is a valuable strategy for mitigating losses and capturing broader opportunities.
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An Amber River financial planner can work with you to understand your appetite for risk and capacity for loss, as well as your wider circumstances and goals. They can then create a bespoke, diverse investment strategy and maintain the discipline you need to achieve your long-term objectives.
To set up an initial appointment with an Amber River financial planner, call 0800 915 0000. Aternatively, you can use our contact form to arrange an appointment.
Disclaimer
The information within this article was correct at the time of publishing, but laws and tax rules are subject to change. Your circumstances and where you live in the UK may also have an impact on your tax treatment.
To learn about the government’s most recently-announced changes, please read our latest budget roundup: 2024 Autumn Budget Update
