QUICK QUOTES
Time In the Markets Beats Tim-ing the Markets
Another Warren Buffett often repeated quote is that “Time in the market beats Timing the market,” a basic premise that leaving investments alone to grow is more beneficial than trying to enter and exit at key “timing” points. Arguments can be made for both sides, however, as each possess different advantages.
For newer, and especially younger, investors, who are not overly familiar with “timing” techniques, such as technical chart reading analysis, seasonal cycles, and price action, it is likely best to stick to identifying solid stocks with a history of growth and/or dividend distributions to safely invest. Statistics show that those who remain in the market for longer periods can accumulate wealth by compounding their gains. Whether accomplished by re-investment of dividends, dollar-cost averaging, or simply owning indexes/stocks that increase over time, many individuals can achieve their financial goals without much actual involvement in the “trading” process. For those with pensions and employer sponsored 401k’s, the process is even easier as they leave the decisions to the fund managers, for a percentage fee.
The advantages to this “time-in” approach are rather obvious, as it takes little to no knowledge, research, or understanding of how to invest to accomplish one’s goals. Over time, indexes have proven to rise, as is evident by the constant “all-time highs” often reported on the major indexes, including the S&P 500 (SPY), Dow Jones Industrial Average (DJIA), and Nasdaq (QQQ) indexes. Depending on one’s age, decades of investing in this manner can create a large financial windfall in retirement. Many accounts are established with a designated retirement age, and are risk-adjusted as the individual approaches that age, allowing the investor to essentially ignore the downturns in the markets. There are also many tax advantages as long-term holdings are taxed at a lower rate than short-term.
The disadvantages, however, include the lack of control one has over their portfolio, the risk of a major market downturn just as the planned retirement arrives, and the fund potentially lagging behind the rate of inflation. Some individuals who planned on retiring in 2008-2009, for instance, were forced to add on years of additional work as the Great Financial Housing Crisis occurred at the most inopportune time. And, unless the manager is very active, little to no opportunistic gains are realized as positions are usually only altered once per quarter. Therefore, if a set amount of money is deposited into the fund at those intervals, there is no chance of greater gains from larger deposits at market lows.
More accomplished investors/traders, however, prefer to take advantage of constant opportunities that a volatile market creates. By studying cycles, chart patterns, price action, sector rotation, indicators, and market sentiment, they attempt to achieve short-term gains, using the “timing” approach. These individuals are known as Swing (short-term but longer than 1 day) and/or Day (in and out of position(s) on the same day) traders.
Advantages to this approach include the ability to take advantage of market “dips” and “corrections,” as well as short-term gain opportunities. Though this requires a significantly higher amount of market knowledge, study, and risk management, but when done correctly one can benefit from the shorter-term gyrations and cycles of the equities markets, potentially adding to their gains without being fully at the mercy of longer-term, ill-timed, downtrends. With added volatility in recent years created from algorithmic machine trading, and many more retail traders, the astute individual can realize much higher returns by employing this method.
The disadvantages to this method, or course, is the added risk, and the requirement of consistent accurate “timing” when entering and exiting positions. Emotional Control is also essential, which for most can only be developed with practice. There are also higher tax implications with the current rules of investing vs trading. A “trader” is required to maintain a certain amount of funds in their account (currently $25,000) to be authorized for day-trading, and must have experience to involve options. It is also stated that about 97% of day-traders lose money, which puts the odds heavily against this type of approach. It is suggested that one follow a mentor, or become highly proficient in paper-trading before attempting this with real money.
Overall, for those who wish to become more involved, and potentially manage and trade their own account, it may be wise to employ both methods. Possessing a long-term, passive investment account of some sort, and a smaller, shorter-term account with funds that are expendable, may be a good balance.
Develop your own plan with your Financial Advisor and as always, don’t let emotion affect your investing/trading strategies!
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.
