Time In The Market Is More Important Than Timing The Market

"Time in the market is more important than timing the market" is one of those slogans you hear very often in personal finance circles that it almost feels cliché.  However, like a lot of these nuggets of wisdom, it holds serious weight when you unpack it, especially when you think of investing with a Barista FIRE mindset like myself, where the goal is financial independence with part-time work to supplement your lifestyle. As such, let us take a look into why focusing on time in the market is so crucial, and why trying to time the market can be a dangerous distraction.

1)     The Power of Compounding Over Time

Investing is often compared to a marathon, not a sprint (traders may not agree but I belong to the clan of long-term investing).  When I invest consistently over time through dollar cost averaging (DCA), I am giving my money the chance to grow, not just linearly, but exponentially, thanks to the power of compounding (for dividend investors like myself, this is where reinvesting dividends make the magic works).  Einstein reportedly called compound interest "the eighth wonder of the world" for a reason, because through compounding, I am not just earning returns on your initial capital, I will also earn returns on your previously reinvested dividends.

The longer my money stays invested, the more time it has to compound.  A 10% return on $10,000 becomes $11,000 after one year.  The next year, instead of earning 10% on $10,000, I will be earning 10% on $11,000.  The cycle continues to snowball over time.  The important golden rule here is that I will need to give it time.  Patience is key in this process of compounding, and I cannot beat it by trying to jump in and out of the market.

2)     The Futility of Timing the Market

The problem with trying to time the market is that it is nearly impossible to do consistently.  Sure, one might get lucky once or twice, but market movements are unpredictable, and sometimes even irrational.  The reality is that nobody, not even the best investors, can perfectly predict when the market will go up or down time and time again.  Take for example, Mr Tom Lee, head of research at Fundstrat Global Advisors.  He has accurately predictable many of the all time high levels that the S&P 500 has managed to reached this year.  However in late August, he has predicted that the S&P 500 may correct by 7 to 10% in September and October 2024.  However, as we have seen, September had been a great month for stocks, and if I have sold part of my shares in anticipation for any decline in September, I would have missed out the spectacular run up for the month.

Generally, when you try to time the market, you risk missing the big days.  It is important to note that a few key days usually account for a large portion of the market's long-term gains.  If one is out of the market on one of those days, you’re missing out on some of the juiciest growth.  According to historical data, missing just the top 10 performing days in the stock market over a 20-year period can drastically reduce your returns.  Imagine sitting on the sidelines during a bull run?  That would have been a painful experience to be missing out on all of those gains.

For someone chasing Barista FIRE like me, where the goal is financial independence, this is doubly important, because I will be trying to achieve a lifestyle where part-time work income covers my monthly expenses while my investment portfolio do the heavy lifting in the background.  To achieve that, I definitely cannot afford to sit out the market’s best days.  Since my investment horizon is long, weathering short-term volatility remains to be part of the game.

3)     Markets Reward Patience

Looking at the stock market over any 10-year period, the vast majority of the time, it has been generating positive returns.  That is because markets tend to reward those who stay patient and disciplined.  We live in a world where everything moves fast, be it news, social media or life updates.  If we trade the markets based on news, we will definitely lose out to sophisticated traders, institutional investors, hedge funds etc. who are able to access the news much earlier.  So more often than not, before any buy or sell trades can be made by ordinary folks like myself, the markets had already moved and the money has been made.  Coupled to that, if we are not sufficiently nimble, we will end up being bagholders (割韭菜).

4)     The Emotional Cost of Market Timing

Beyond the numbers, trying to time the market adds a level of emotional stress that most people are not equipped to handle.  Personally, I think that if I need to constantly watch the markets, making decisions based on headlines, I can easily get caught in a cycle of fear and greed, ending up selling when stocks are down, fearing further losses, and buying when everyone else is euphoric, often paying too much.  These emotional reactions definitely lead to poor decisions being made.

By focusing on time in the market, I can easily avoid this psychological roller coaster.  I can simply create a system where you invest regularly through DCA regardless of market conditions.  Over time, this helps to accumulate wealth, stress-free.  This is evident in my past investment journey.  I started buying my first stock in 2009, but with a trading mentality with no system in place.  This poor decision lasted till 2017 (yes, it took me 8 years to knock some sense in myself) before I eventually come up with the plan to execute my current path of investment.  Prior to 2017, my returns are miserable because of the constant buy and sell which limits my profits, because I tend to earn small gains but realize massive losses.  It is truly after I execute my current investment strategy with a plan, I can truly see the gains accumulate and my portfolio grow consistently to where it is now.

5)     Aligning With Barista FIRE

For those on the Barista FIRE path, where one is not aiming for complete retirement but rather, financial freedom with a flexible lifestyle, the idea of time in the market becomes even more critical.  Personally, I am definitely not trying to strike it rich overnight through investing (though I would not mind striking Toto), instead, I am playing the long, boring game of wealth accumulation.  By staying invested and giving my money the time it needs to grow, I believe I am setting myself up for the kind of financial freedom that gives me choices, whether that means cutting back on work, pursuing a passion, or just living life on your own terms.  Remember, a snowball will need a long slope before it can roll and grow to become a massive giant snowball.  Time in the market is definitely the essence to let compounding work its magic.  

With all the above in mind, the takeaway for myself is clear.  Trying to time the market is not only risky, but it can also delay your progress towards financial independence.  In contrast, staying invested and letting time do the heavy lifting allows you to benefit from compounding returns and long-term market growth.  Since my goal is financial freedom through Barista FIRE, the key is patience, discipline, and sticking with my investments through thick and thin, but at the same time, remain vigilant to ensure that the fundamentals of the companies I invest in do not deteriorate.  In the end, time in the market definitely beats trying to outsmart the market every single time.  Barista FIRE, here I come...!