Equity markets have recovered well after dropping sharply in the month of March in the coronavirus-induced market crash. Since then, they have been climbing steadily even in the face of all the negative reports coming out regarding the state of the global economy.
This divergence between economic backdrop and the state of the market has had many people thinking that the market rise is not backed by fundamentals, and that a market crash might be round the corner again.
If the above thought, or a variation of it, has crossed your mind, then I have an old adage to share with you: It is not timing the market but time in the market that is important.
Trying to catch the top or the bottom of a volatile market is is what is being referred to here as 'timing the market'. In my opinion, more money is likely lost in markets trying to catch absolute bottoms and tops than any other activity.
On the flip side, investing with a long-term horizon and patiently waiting through such volatile periods is what's known as 'time in the market', and this is what generates wealth over time.
Can markets be 'timed'?
Let's ask some simple questions to help us answer this.
Can Mount Everest be climbed? Yes, and some people have indeed climbed it.
Can you climb it? Potentially, but it would require some serious training and willpower to do so.
Do training and willpower guarantee that you will reach the summit?' Sadly, no. As mountaineers who have attempted the climb would say, 'you do not climb Mount Everest, it lets you climb it'. Even with the best training under your belt, there is no guarantee that you will reach the summit. In fact, some of the best mountain climbers have died attempting Mount Everest, despite being at the top of their game.
In my opinion, you can think of timing the market as similar to climbing Mount Everest. It can be done, and some people indeed do manage to pull it off, but the activity is highly hazardous, and the odds are stacked heavily against us.
Thankfully, there are other ways to be successful when investing in the share market.
Time in the market
As investors, one of the biggest edges you have is your time horizon. When you buy shares with the aim of being invested for multiple years or even decades, the short-term noise of the ever-churning stock market matters much less.
As an ex-fund manager, I can tell you that most fund managers running large investment funds do not have this edge, because of the short-term performance pressures they face. And it is an edge they would give a lot to have.
A sound way to approach investing in equity markets is to select a few solid companies that you know about, make regular investments in them over time and then wait for market to do the work for you. Warren Buffett said this best: "The stock market is designed to transfer money from the active to the patient." So, be patient and invest both money and time in the market.
So then when do I sell?
I believe that the act of selling shares is more complex and difficult than that of buying. When it comes to buying, your end objective is simple and straightforward – to generate wealth over time from surplus cash.
But your objectives for selling could be many. Perhaps you need to sell for emergency funds, or the termination of financial planning goals like paying for your children's college. Perhaps a company's performance isn't turning out as expected, or individual stock investments have reached their market potential, or perhaps you've simply come across a better investment opportunity. And then there is the whole psychological aspect of selling, which deserves a full article dedicated to it some other day.
The key takeaway here is that being patient – or investing 'time in the market' – does not mean that you never look to sell. It means that you wait for the right reasons to sell, and not just because you're trying to time the market and get out before a crash.
