Bitch Nation, things around here have been far too peaceful for far too long. No cage matches, no Fury Road-style races to the death. We haven’t even had an inter-Bitch argument in ages.*
So you know what that means…
IT’S TIME FOR ANOTHER INSTALLMENT OF INVESTING DEATHMATCH!
In this recurring series, we pit two investing strategies against each other, examine the merits of each, and determine which is best for you, the investor. Along the way we hope you learn a little about the stock market, but really… we know you’re just here for the gifs.
Two investing strategies enter! Only one will survive! Who will win this most neurotic and numbers-based fight to the death??? Only time (and minute examination of historical stock market trends) will tell!
Let’s meet our contenders.
The reigning champion: Time in the market
Ladies and gentlemen of the Thunderdome, our reigning champion may be old, but don’t count it out. Since the dawn of the stock market itself, one principle has reigned supreme: playing the long game.
Investing is not a race, and traditional advice states that investors should be more tortoise than hare. If you want to invest your money, you shouldn’t expect an overnight return. Instead, you should invest with an expectation of returns years or even decades down the road.
That’s part of why so many retirement funds are invested in stocks and bonds. You tuck your investments away early in your career, expecting them to grow exponentially over the decades. If all goes according to plan, your money will have grown like a tampon in a toilet bowl by the time you’re ready to retire.
Invest your money and ignore it for decades.
The stock market will fluctuate, rising and falling in mildly unpredictable cycles. And you’ll do nothing to compensate for those rises and falls. Just wait.
This is sometimes called “passive investing.” And historically, we’ve strongly recommend it!
Yes, the reigning champion is indeed time in the market, the tried-and-true method of investing your money wisely… and leaving it alone. You don’t need to move money around on a daily or weekly basis, according to this strategy. You just need to be willing to stay the course.
Day trading? More like decade trading, AMIRITE?
The upstart challenger: Timing the market
Our upstart challenger is popular among the investibro set. If you’ve followed any news about meme stocks, then you know that timing the market is currently all the rage.
In contrast to the traditional, “passive investing” time in the market strategy, timing the market is sometimes known as “active investing.”
The idea is that, instead of sticking your money in the stock market and ignoring it for decades, you stick some money in the market… and watch it very, very carefully. You’re prepared at a moment’s notice to move it around, pull it out, and stick it back in, very much like… um… a shuttle docking with the International Space Station.**
To quote Hot Zaddy of Investing and billionaire who can totally time my market whenever he wants, Warren Buffett, “Buy low and sell high.”
Those who attempt to time the market aren’t just operating on a wish and a prayer. This strategy actually has some sound principles behind it! The idea is that when the market peaks and company shares are at their most expensive, you should sell the ones you own. Then, when the market tanks and stocks are at their cheapest… you buy them all up.
By timing the market, your goal is to essentially only buy when stuff is on sale and then sell it when there’s high demand and, therefore, high prices.
Think about all those
war profiteers people who bought medical-grade masks just before the COVID-19 outbreak, then sold them at about 1,000% their normal market value to people desperate to survive at the height of the pandemic. Same principle, slightly less appalling ethics-wise.
And the winner is…
Time in the market!
And the reason for this big K.O.? Investors ain’t psychic.
It’s ridiculously difficult to predict fluctuations in the market with any amount of accuracy! There is no 100% foolproof way to time the market 100% of the time. You’re as likely to miss out on gains and buy at a loss than you are to beat passive investors over the long haul.
Economist Benjamin Graham (another Investor Zaddy who can dollar cost my average any day of the week) famously said, “In the financial markets, hindsight is forever 20/20, but foresight is legally blind.” Timing the market is impractical! And it’s stressful when you get it wrong! And you will get it wrong.
Meanwhile, giving your investments time in the market is not only easy, less time-consuming, and comparatively stress-free… it fucking works.
Our boy over at Clipping Chains has a great article on why market timing (still) doesn’t work. He talks about the snowballing effect of timing the market wrong over and over again. Quoth CC: “Too often, folks cash out too early, and get back in too late. Or worse yet, uncertainty and fear can result in cashing out late in a crash. The shell-shocked investor is battered by realized losses, and only gets back in the market long after prosperity has returned. All of a sudden, buy-low-sell-high turns into sell-low-buy-high.”
Was it a close match?
In a word? Nope!
If we look at historical stock market trends, the stock market always, always trends upwards. Even after a major crash or recession… the stock market recovers. Which means that even if the value of your investments goes down on paper… they’ll go back given time. Just so long as you leave them be!
Plus—and this is a little hard to wrap your brain around—you don’t actually lose any money on investments unless and until you pull your money out of the market. Which is another reason why you should view the stock market as a way to build wealth over the long term, not overnight.
But let’s look even closer, get even mathier. Studies show that there’s an almost 8% difference in return on investment between active and passive investors… in the passive investors’ favor.
More evidence shows that 95% of finance professionals—the people who are highly paid to be good at investing—can’t time the market effectively over time. And if those money nerds can’t get it right, you probably shouldn’t even try.
So stick with passive investing! Don’t get knocked out in the first round. Give your money time in the market and win the fight!
*Not true. Just the other day we were viciously arguing… about lasagne. Because we are never more impassioned than when food is on the line.
**We’re contractually obligated to include a minimum of one penis innuendo per article. Check the fine print.
New to investing?
If you’re convinced by this episode of Investing Deathmatch to start investing… try our favorite micro-investing app, Acorns. Acorns sticks your money in ETFs (exchange-traded funds), which are like mini index funds. Everything about them is mini and micro—they even withdraw money from your checking account in lil’ round-ups of change after every purchase you make. SUPER CUTE, YOU GUYS.
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7 thoughts to “Investing Deathmatch: Timing the Market vs. Time IN the Market”
There are rare times in life where laziness is rewarded but passive investing is where my lazy side gets to shine. Its. So. Sparkly!
Right? It’s perfect!
Warren Buffett even bet someone (maybe a hedge fund manager?) that his passive investing would make more money than the other guy’s active investing over the course of ten years, and of course he won that bet. Passive investing is the only way to go!
ZADDY. Case closed.
I recently rolled over over 26K from a prior 401K to an IRA. I’d been waiting a few weeks to figure out what to do with it because I would “have the time” at some point. I literally just threw it all into the total stock market index. One and done. Thanks for the reminder.
Could not agree more! Love the fact that this is true and proven. As Budget Life List said – one of few circumstances in life where being lazy / automating investments pays out.
PS came for the financial info and snark, stayed for the Matrix gif 🙂
Plus, where would you put all of those lovely dollars when they are not invested in stocks?
Real life scenario – my husband and I have kept our money separate for 30+ years. He has always saved significantly more than me because he made more and spent less but he “timed” the market. I saved less but let it ride.
Our net worths are neck and neck. Passive investing for the win is right!