Avoid Market Timing to be successful in investing

At inbestMe, we strongly believe that market timing is best avoided, and we encourage our clients to adopt this approach to successful investing.

Note: “Market Timing” could be understood as “timing the market” or looking for the objective of finding the best times to invest in the stock market. At inbestMe we try to avoid anglicisms when we write in Spanish, but we believe that in this case and after this explanation we will continue with the anglicism, since it is well known.

What is Market Timing?

Market timing is an investment strategy that involves trying to buy and sell stocks to maximize returns by predicting market movements. Typically, it means being able to guess when stock prices are at lows (or lows) and ideally selling when they are at highs. However, market timing is often not a wise investment choice. Holding too much cash in a checking account, stopping regular contributions to our investment plan during difficult periods or divesting during a market correction or bear market are all conscious or very often unconscious forms of market timing and actually very unmanageable and generally yield worse results than staying invested.

Why avoid Market Timing?

The main problem with market timing is that it is impossible to get it right consistently. This is especially true when we take it to the extreme: for example, selling our investments and staying in cash to avoid a bear market or a major correction.

This is even more evident if we think that successful market timing requires getting it right twice: first, choosing the best time to divest and, second, identifying the optimal time to return to the market. Mistakes in the timing of entry and exit can be very costly. The best days in the market typically occur during the toughest recessions, and missing even a single day can drastically affect the long-term value of capital.

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Market Timing has a high cost

Numerous studies show that time in the market (being invested) trumps market timing. There are numerous studies that show that missing just a few of the best days in the market can significantly reduce an investor’s average returns over time. Many of the best days for investors occur during recessions or bear markets, while some of the worst days occur during bull markets.

There are multiple studies that demonstrate these statistics, such as this one from Vanguard Europe.

Prepared by Vanguard

This study shows that 12 of the 20 best trading days since the 1980s occurred in years that ended in the negative, and 6 of the 20 worst occurred in years that ended in the positive.

Prepared by Vanguard

The study also determines that the longer you are disinvested the more likely you are to fall below the average (in a 60/40 portfolio equivalent to a profile 6 on inbestMe) and the loss of return is higher the longer you are disinvested, from 0.9% (1 month out of the market) to 9.1% (12 months out of the market).

We demonstrated this effect even in recent crises.

Determine your objective and follow your plan

At inbestMe, we are aware of the difficulties of predicting market dynamics in the short term. That’s why we build well-diversified portfolios based on medium- and long-term forecasts, which are generally more reliable. And we recommend staying invested over time.

With the confidence of nearly 9,000 managed accounts and 200 million euros under management, we offer management based on indexing and automation at low cost. We tailor our services to our clients’ needs and risk profiles, providing the clarity and peace of mind needed to navigate the volatile world of financial markets.

We encourage our clients to segment their targets and then stay invested in all their different accounts, even in the most difficult times, prioritizing medium and long-term growth.

This is not the first time we talk about this topic more or less directly and you can see more in the following posts:

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