“Time in the market is better than timing the market”

Although this saying may feel cliché or just seemingly a word play using homophones, it brings lots of wisdom to our investment journeys. Many investors have the over-confidence that they are the chosen few who can predict the markets and beat the index. But the truth is that about 90% of actively managed equity funds underperformed their respective benchmarks over the last 15 years and more than 80% of large-cap funds underperformed the S&P500 over the last 5 years. All this research from S&P SPIVA reports goes to show how consistency beats spotting the market.

We can visualise this shocking result in a few different ways.

First, the idea of regression and mean reversion – most famously known as the best-fit line. In all data sets that spans across time, we have many observation points that has a price point to it. To compute our average growth, we take the best fit line over long periods of historical data after adjusting for inflation and compounding effects. Variance resulting from various historical market events can be seen above and below the best fit line. This best fit line being the average of many data points will be the line where data mean reverts to. We have a much greater chance to end up at the average by investing consistently over time (landing on multiple points on the blue curve) rather than throwing in a huge chunk of cash trying to spot the bottom (kinda like a 50-50). If given a choice, which would you pick? 1. One toss, 50% to gain $15,000 and 50% to lose $10,000 2. Thousand tosses, 50% to gain $15 and 50% to lose $10

Second, apart from the well-known macroeconomic risks such as that of concentration risk, there also exists another dimension which is time-related risks. “Buying at an extreme low and selling high” often occurs in a very short burst of time that we may easily miss out considering how busy our lives are and we may even be in an era of extended gains which we aren’t really buying low. The recent stock market bearishness in Jan 2022 is very well just a technical correction back to the mean rather than that of a market crash. Throwing all our spare cash in right now may be a questionable choice to make as we are just entering in at the mean, rather than at a low. Although we tend to always be at all-time highs for such an index and a common thought is to wait till the next market crash, the next crash’s lowest point may be higher than where we are at now. And, if a crash truly comes, will you dare to throw all your money in it without the help of your hindsight bias?

Third, there exists the upward bias of equities due to population growth. When we hold our equities for the entire duration for the next 20 years, we will be riding through the ups and downs and all the events that play out. But, at the end, fundamentally strong companies will still see the rise in value from the sole reason of population size and impactful news, both positive and negative, tend to negate themselves in the long run. You see, the top companies in the world are consumer-serving. Take for example: Apple for their devices, Microsoft for their operating system, Google for their search engine, Amazon for their e-commerce, Tesla for their vehicles, NVIDIA for their semiconductors for our computers. They have their fair share of ups and downs, and big corrections each time. But they will stay on the rise simply because they are serving the world’s population. If we were to be picky with our time in the market, we may miss out some parts of the ride up (on average).

All in all, not only does stock picking has potential downsides as we all know about the importance of diversification for normal investors such as us, timing the market may pose its own challenges too. If we are keeping tabs on the markets all the time, perhaps it could be justifiable to “time the market and cherry pick your stocks”. At the end of the day, investing in our future should be made easy and of little hassle – otherwise, why not be a full-time trader instead?

If you're interested to chat on this topic or to exchange ideas, please feel free to drop me a message on Telegram @elijah2212 or through email elijah.thj@gmail.com!