In investing there are two broad strategies you can follow.
You can try to time the market. That is, try to buy when a share or other asset class appears to be cheap. Then sell it for a profit when the price rises.
Timing the market is popular with some dynamic investors, including those who think they can beat the market. It seems more attractive right now when the market is more volatile.
The second investing strategy is to buy carefully. Then stay in the market and hold your investment for the long term.
In this post we’ll look at the pros and cons of each strategy and at which is the most successful.
Timing the market. The pros of timing the market are that you can make some spectacular gains by buying just before a share soars in value. Plus, selling before it drops leaves you with that satisfying feeling that you’ve beaten the system.
The cons of timing the market are that it can take a lot of time and effort. You need to carry out detailed technical and fundamental analysis of each stock. For it to really pay off, you need to time the market successfully twice for each investment – once when buying and once when selling.
With this approach your dealing costs can be quite high too. And, no matter how skilled you are, it’s still possible to get caught out by unexpected movements in the market.
Staying in the market. The cons of staying in the market are that you will sometimes suffer losses – and sometimes they could be pretty significant ones. Staying in the market can only be a long term strategy in the expectation that losses will be reversed – eventually.
The pros of holding are that it’s straightforward. You don’t have to study the market, nor be buying and selling constantly. The savings in dealing charges can make quite a difference to your returns too.
So which strategy works best?
Over the years a lot of research has been put into trying to establish which investing strategy works best.
Look around, and you’ll find much research comes down firmly on the side of staying in the market:
* This report by Investopedia, quoting research from bank and brokerage firm Charles Schwab, says that over the period between 1926 and 2011 a 20-year holding period never produced a negative result. It adds, however, that keeping careful tabs on and ‘cultivating’ your portfolio is still sensible.
* This research on Market Watch, quoting research from SVRN Asset Management, suggests that over the period between 1926 and 2016 timing the market would have produced an annualised return of 2.2%. But buying and holding would have produced an annualised return of 6.4% – almost triple the returns.
* This report by Vanguard says that £1,000 invested from 1985 to 2018 would have grown into £4,770 using a market timing strategy but £7,000 using a buy and hold strategy.
At the end of the day, of course, you’ll need to take professional advice and choose an investment strategy that suits your personal objectives. But we think that there’s a lot to be said for staying in the market rather than trying to time the market.
