Three examples of why time—not timing—is an investor’s best friend
Beginner investors often hesitate to “take the plunge” into the markets, placing too much value on “timing” their entry correctly. But the evidence is clear—it’s better to be invested for the long term, as opposed to timing the market. Here’s why.
1. The power of compounding
When you invest, your earnings (if left to grow uninterrupted) generate their own earnings over time—and these compounding returns are the bedrock of long-term investing. If you have a long investment horizon, it’s better to allow your savings to do their thing in the markets rather than try to pick the market’s bottoms and tops.
For example, a USD 10,000 investment in the MSCI USA Total Return Index in 1980 would be worth around USD 1,050,000 in 2024, assuming all dividends were reinvested.
2. The risks of timing the market
Timing the market is an incredibly tough thing to do. Professional investors don’t believe they can do it, so you need a certain level of conviction to believe that you can.
Timing the market comes with the risk that, instead of avoiding the worst days on the market, you risk losing out on the best days, which may be a greater disservice to your savings. Consider the following data for the US S&P 500 from 1991 to mid-2024:
Beginner investors often hesitate to “take the plunge” into the markets, placing too much value on “timing” their entry correctly. But the evidence is clear—it’s better to be invested for the long term, as opposed to timing the market. Here’s why.
1. The power of compounding
When you invest, your earnings (if left to grow uninterrupted) generate their own earnings over time—and these compounding returns are the bedrock of long-term investing. If you have a long investment horizon, it’s better to allow your savings to do their thing in the markets rather than try to pick the market’s bottoms and tops.
For example, a USD 10,000 investment in the MSCI USA Total Return Index in 1980 would be worth around USD 1,050,000 in 2024, assuming all dividends were reinvested.
2. The risks of timing the market
Timing the market is an incredibly tough thing to do. Professional investors don’t believe they can do it, so you need a certain level of conviction to believe that you can.
Timing the market comes with the risk that, instead of avoiding the worst days on the market, you risk losing out on the best days, which may be a greater disservice to your savings. Consider the following data for the US S&P 500 from 1991 to mid-2024:
If you were fully invested throughout 1991–2024 in the S&P 500, you would have earned 11% annually on your investment. But if you missed just the 30 best days, you would have more than halved your return.
Manoeuvring in and out of the market at the right time is near-impossible, so the wisest approach is often to simply stay invested.
3. Time is the great equaliser
There’s another simple way to understand why time in the market beats time in the market. The table below shows annualised returns in US equities from a given starting year to mid-2024, based on investing at the market’s highest point for that year (worst entry) and the market’s lowest point for that year (best entry).
The data shows that, in most years, the difference between “perfect timing” and the bad luck of entering at the worst possible moment is only around 1% annualised. It’s also clear that, while timing can make a difference in years with large swings or declines, successfully timing the market remains exceedingly difficult.
But the most important lesson is that, as you stretch out the time horizon to 30 years (1994), the difference between perfect timing and random bad luck is very small (in this case, only 0.3% annualised). In general, the differences are so small that investors should not overcomplicate when to invest. Instead, spend time finding the right investment for you, preferably at a low cost, and just do it.
