Time in the Market vs. Timing the Market

It doesn't take long to find various articles touting the "5 best stocks to buy now" but is that a good idea?

The temptation to try to "time" the market, especially in a down market, can have a strong pull. When stocks are down below 10 year lows, as some are now, it can be tempting to "buy low" in order to "sell high" later. But is that the right thing to do?

Beating the experts

“The Stock Market is a device for transferring money from the impatient to the patient." -- Warren Buffett

Most of us are not experts in stocks and finance. We don't spend all day every day pouring over charts, analyzing company balance sheets and annual reports in order to determine who will be the winners and losers. When stocks are "cheap" however, some people think that by reading an article or two they can pick a few "winners" that will get them ahead of the experts. This is rarely the case. Jumping in and out of the market can lead to disaster. In a study by Fidelity of roughly 10,000 market days from 1980 to 2018 they found if you missed the best 10 days of the market (which often followed the worst days!) your return would be cut in half!

Steady investing is the best bet

The experts who DO spend their career in stocks and finance will tell you that the best way to invest is slow and steady over a period of months and years (and decades!) to build financial wealth. Investing by this method takes advantage of two important financial concepts: The power of compound interest and Dollar Cost Averaging

“Compound interest is the most powerful force in the universe.” - Albert Einstein

Albert Einstein knew about powerful forces. He studied day and night the forces that drove the universe forward and made the world go around. And yet, he considered compound interest to be the most powerful force he had found. Compound interest means leaving the interest earned (or gains and dividends in the case of stocks) in the account to continue to grow. For example, Mary has $10,000 to invest. Invested as simple interest where she removes the interest every year, at 5% she should make $10,000 over 20 years, doubling her money. Sounds pretty good right? However, if Mary were to make one simple change and leave the interest to grow with the principle, her total after 20 years would be over $26,000, 60% more than if she removed the interest! Leaving the gains to grow on top of the principle can make a big difference over time.

Dollar Cost Averaging will help you win

Dollar cost averaging means investing steadily with the same amount over time in the market, rather than saving money outside of the market and putting it in all at once. This helps to lower your overall cost per share of a stock or mutual fund by buying more shares when the price is low, and less shares when the price is high. Using this slow and steady method, you are actually better off buying while the market is going down than when it is on the way back up!

Hire an expert

Luckily there are people who's daily job it is to worry about your money. Investing steadily and using a trusted advisor or financial planner can help you have less stress and worry about making the right decisions. Make sure you hire a "fee based" advisor who doesn't make commissions from sales but rather one who's success is tied to your success.

Good Luck, and happy investing!