What is the difference between timing the market and time in the market? We will see in great detail what it means by timing the market vs time in the market.
The difference between the two is the same as between speculation and investing. Investors who time the market try to beat the market by outperforming it, whereas time in the market means investing.
Investing is focusing on the quality of the asset and holding it for a long time.
Due to the connection between the market and volatility, the short-term direction of stock prices is always volatile. But when you focus on spending time in the market, you let the quality of the asset and the power of compounding play a part.
What is the timing the market?
Timing the market means buying stocks when the market has bottomed and selling when it reaches the peak. But it is more challenging to capture the market at the right time. It is almost impossible to determine when the market will reach the bottom.
The execution of the timing of the market strategy is flawed because the future is uncertain, and the stock price changes rapidly, meaning it is impossible to predict the market accurately every time. So, is it only a gimmick? Not exactly! Investors can profit from predicting the moments when the market goes through corrections and crashes.
When we invest with the mindset of timing the market, we buy and sell stocks depending on the market situation. It is a trader’s mindset, who frequently buys and sells. But in equity investing, buying and holding strategy is safer and helps to eliminate market volatility.
Furthermore, frequent buying and selling of stocks incur fees and taxes as mandatory expenses. It doesn’t allow your money to compound and adds to losses.
What is time in the market?
Time in the market is an investment strategy where investors don’t try to predict the moments of high and low. Instead, they will buy stocks based on the company’s fundamentals.
Investors will hold onto the stocks until the original reason to buy changes, or they reach their desired goal.
Here are three reasons why time in the market is better than timing the market.
Predicting the future is impossible
Stock prices are unpredictable. It is not possible to predict where the market is going.
Guided by emotion
When investors try to time the market, they are tempted to sell their investments too quickly to ensure small profits or to avoid losses. It is the mindset of a trader. The stock market is naturally volatile, and the stock price fluctuates daily. Those who try to time the market are governed by greed or emotions, known as the ‘behaviour gap’.
Frequent buying and selling involve costs which further lower your income. Someone who trades frequently will see the costs adding up to a significant amount.
Timing the market vs time the market: Smart investment
If anyone wants to earn above-average returns from the market, timing the market becomes critical. But one should also stay invested for a sufficient time to let the money compound.
What should you do? It’s essential to begin investing with a candid idea of your financial goal. Once you do this, it will become clear that timing the market is not the right approach. Retail and small investors benefit from staying invested over a while since it eliminates the risks of market volatility.
But should you ignore timing the market completely? Of course not! Timing the market is easy when investing in a market index. One doesn’t need to worry about the constitution of the index as it includes only fundamentally strong companies.
However, investors should apply stock analysis when buying individual stocks. If one is not careful, one can end up with bad company. To avoid a bad investment, one must use fundamental analysis and price valuation of stocks.
Portfolio diversification is a way to reduce risks from individual stocks. It involves selecting 15-20 fundamentally solid and high-quality companies.
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Disclaimer: “This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock”.