Time In Market, Not Market Timing

Advice from an investor can help one grow their own wealth, however advice from a successful investor will help focus investment time in market, not market timing. Too often (short-term) investors believe there is a right and wrong time to invest, however (long-term) investors see the reality of profit growing from the time spent in the market.

Betterment has illustrated this rule with one of the longest-running index data sets available: the daily returns of the S&P 500 from January 2, 1928, through 2014. CLICK HERE to interact with this tool on Betterment.com and see the historical probability of a loss and median return by period length. 

Results from this illustration tool on Betterment.com breakdown this scenario: From 1928 to 2014 there were 21,502 possible holding periods that lasted 12 months (e.g., Jan. 2, 1928, to Jan. 2, 1929; Jan. 3, 1928, to Jan. 3, 1929, etc.). Of those 21,502 holding periods, 74% resulted in positive returns with a median return of $13 on a $100 investment. On the other end of the slider, there were 18,730 possible holding periods that lasted 12 years. The returns for these holding periods were more widely dispersed and overwhelmingly positive, with a median return of $240 on a $100 investment.

Now, let’s take a look at the risks involved with the following graphs, representing the relationship between time and return investments, concluding that time in the market is more valuable than market timing.

Short-Term Risks

The graph below represents the relationship between probability of loss and holding period. Just past one year the proportion of losses drops substantially. This is one key part of the time-in-the-market advice.

If investing in the S&P 500, the risk of loss is much higher for the short-term investor than the long-term investor.

betterment 1Betterment

Long-Term Return

As apposed to long-term, taking an analysis of the median total cumulative return for every given holding period, stabilizing the steady line and eventually rising over time.

betterment 2Betterment

Conclusion

Looking at both graphs we come to the conclusion that time in the market is what matters, not market timing. Risks will be greater in the broad market for short-term investments compared to long-term investments and by staying in longer the risks will likely go down.

Source: Betterment 

photo credit: Alan O’Rourke via photopin cc

​NOTE: This information is based on the historical analysis of the S&P 500, not a Betterment account. Historical S&P 500 data is available at Yahoo Finance and from Robert Shiller. The above charts do not factor in trading or transaction costs. ​Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Betterment’s charges and expenses. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature