If you invest in shares and have been doing so for a while, chances are you've heard the phrase 'time in the market beats timing the market'. It's a nice improvement to the far more common 'buy low, sell high' that most of us would be familiar with.
For many of us, the thrill of buying shares when they are on sale during the infrequent but inevitable market crashes leads us to stockpile cash in anticipation of these bargain bin opportunities. I myself have been known to be guilty of this.
And it's also what the great Warren Buffett is famous for doing. So why wouldn't we want to copy his example?
Well, most of us aren't Warren Buffett. Buffett knows the markets perhaps better than anyone on the planet. And trying to copy his modus operandi without his unique skill for stock picking is a dangerous path. For we mere mortals, this may not be the best way of consistently building wealth.
After all, the S&P/ASX 200 Index (ASX: XJO) has often gone many years without a market crash occuring. To illustrate, the COVID-induced crash of 2020, which saw the ASX 200 fall more than 30% from peak to trough, was the largest crash since the global financial crisis some 12 years earlier.
If one had been stockpiling cash since 2008, they would have missed out on a lot of gains that the Australian share market subsequently delivered.
Why most investors should avoid stockpiling cash and just invest
Our own chief investment officer, Scott Phillips, agrees. He recently spoke to Gemma Dale from the NABtrade podcast Your Wealth about this very phenomenon. Here's some of what he had to say:
The sensible, boring but really profitable investing strategies don't tend to change…
Don't miss the opportunity when growth returns, because it will, and it does. Don't miss the opportunity to take advantage of that.
Don't be in cash, in my view, for too long, waiting for the good times to come. Be prudent, but don't be so conservative that you miss the recovery… because the market goes up 9% per year on average.
Don't stay on the sidelines, don't miss those things when they come, because that's where the money will be made, by those who are prepared. Be financially prepared, have the cash, be ready. But also be mentally, emotionally prepared for the next part of the journey.
Wise words indeed. Scott is right to point out that the ASX share market rises around 9% per annum on average. But knowing which years, or which shares are going to see the index rise 20% in one year, and then fall 10% in the next is a hard ask. And if you get the call wrong just once, it can send you back to square one.
As such, it's indeed well worth remembering that 'time in the market beats timing the market'.
