Time in the Market Vs Timing the Market

It is an all-time debatable subject what is better and what to choose.

Time in the Market and Timing the Market both are the most popular concepts of the Financial Market. At a glance, both are looking alike but in actuality, they are not. In this article, we will discuss the risks involved in both.

First of all, we need to know both by definition.

What is Timing the Market?

In general speaking and understanding about Timing the Market is like this:

Timing the Market is the process to identify the proper entry point for the investment.

This process is normally misunderstood by normal investors and intermediaries as it is the process of choosing the odd man out of the available options like sports experts are doing before the match starts and coming up with who will be the winner. All this is done on the basis of the past performance of the players. In the Financial Markets, this is done by analyzing the past performance of the asset classes and on that basis predicting the entry point. Sometimes Predictions and Assumptions might be Right or in other cases, they prove wrong.

One more thing is that the above definition seems to be a half-truth, it focuses on the entry points only.

If we go through Investopedia the definition of Timing the Market is like this:

Market timing is the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods.

 Predictive methods for guiding market timing decisions may include fundamental, technical, quantitative, or economic data. It becomes a disaster when the Prediction method is designed to price movements instead of capturing Values or fear and greed override the methods/theory.

It seems to me that different people mean different things when they use the phrase “Market timing” and whether it works or not could depend on one’s meaning and how they apply it in practice.

Advantages and Disadvantages of Timing the Market.

Advantages of Market Timing

  • Bigger profits
  • Reduce the Risk of Losses
  • Reduce Portfolio Volatility – Makes Smooth Journey
  • It is a Real Compounder.

Disadvantages of Market Timing

  • Regular attention to markets required
  • Transaction costs may Increase*
  • Capital Gain Tax may increase*
  • Difficulty in timely entry and exits

* Compared to the Loss you may face if not transacted it is negligible.

Time in the Market

Time in the Market is just the opposite of Timing the Market.

Time in the market refers to the concept of staying invested for the long term. Even if there are short-term fluctuations in the market, investors should remain patient and not make any rash decisions. This is also known as the Buy-and-Hold strategy. In this concept, people believe that one who buys and holds the asset for a more extended period will be more successful than the person who uses Timing the Market.

Many experts believe it’s impossible to consistently time the market and let your investments ride the ups and downs. Time in the market makes us feel like Riding the Rollercoaster as with an upward swing it becomes very successful Investing on another day the same portfolio becomes vulnerable just because of correction in the market.

In general So-called experts are speaking against Timing the Market on one side and on another side they are suggesting Strategies which are actually built on Timing the Market concept only.

SIP – Systematic Investment Plan (RCA-Rupee Cost Averaging)

The best example of this is SIP in which buying assets of the same value is performed at regular intervals.

However people categorize SIP under Time in the Market, In fact, this is a poor process of Timing the Market. Yes, you have read it correctly, SIP is applied because we can not be sure which level is best for buying the asset so buying at every level will generate averaging. Which is sometimes beneficial or sometimes hurts the portfolio. As we discussed the half-truth in understanding the timing of the market, the concept of SIP is just an example of the same.

This is done like shooting at a target in the dark, without knowing whether the price is right or not, buying just on the basis of hope. If the market is continuously going up then your average purchase price goes up and vice versa if the market is continuously going down then your purchase price goes down.

Timing the Market is a relatively debatable concept. Everybody has justified or rejected it according to their own understanding.

Asset Allocation / Rebalancing

By definition, Asset allocation falls under Timing the Market Category. Asset Allocation means spreading your investable money across various types of asset classes — stocks, bonds, cash — based on your goals, risk tolerance and time horizon (the amount of time you have to invest). There are almost six different Asset Allocation strategies adopted in the Market. All are doing the same thing Rebalancing, buying and selling assets at the appropriate time from one Asset class to another Asset class.

Fundamental Analysis – Value Investing

Fundamental analysis (FA) measures a security’s intrinsic value by examining related economic and financial factors. Intrinsic value is the value of an investment based on the issuing company’s financial situation and current market and economic conditions.

Fundamental analysis is the study of anything that can affect the security’s value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company’s management.

Fundamental Analysis / Value Investing is also a member of the Timing the Market category. In fundamental analysis, investments are evaluated by the financial performance of a company as evidenced by fundamental ratios such as PE, PB, Div Yield, CashFlow, gross margin and ROI.

Bottom Line

As we have discussed what is better and which approach is to be adopted from Timing the Market and Time in the Market? At Business Link, we think that it depends on risk profile, Goal and time horizon. It is better to keep both and adopt the hybrid strategies for the optimal performance of your Investment.

Hybrid Strategies

BLTP – The NeXT Gen Investment Strategy is the best example of a Hybrid Strategy where Comparing six fundamentals like Indices, PE, PB, Div Yield, NAV of the Fund, and Inception point of your portfolio and deriving Risk Factors and taking the decision for Buying / Selling on that factor. Will discuss it some other time.

In the coming Blog Article, we are going to discuss another Blunder which is going around nowadays.

The Biggest Blunder of the Market – 2

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Most important note: Views expressed above are the author’s own. The objective of this Blog is to share knowledge and info about new ideas/opportunities in Mutual Funds. Neither is this trading website, an analyst website, nor an advisory website. For Mutual Fund Investment success, always do your homework, analysis, and make your own decisions.

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