When facing a stock market crash, what will you do?
Many analysts and fund managers say that "time in the market is more important than timing the market". Because the markets always recover to end higher over time and it is very hard to catch the bottom. They are better at fundamentals than technical analysis. This is not always true as I will show below. Besides, there's a conflict of interest as they earn commissions.
The common argument for time in the market is that if you missed the 'best days' in the markets, you will get very bad returns.
This is true. Based on a research by the University of Michigan, a buy and hold strategy will yield 10.84% returns per year (between 1963 to 2004). But if you tried to time the market and missed the best 90 trading days, the returns dropped to 3.2%. Therefore so as not to miss the best days, the advice is "time in the market" or stay invested.
But they left out the fact that if you missed the worst days, your returns are even better. The same study showed that if you missed the worst 90 days, you would have achieved 19.57% returns per year over the same period.
Hence in this case, "timing the market pays better than time in the market". This is because missing the worst days are better than investing through the best days.
Lets consider some examples.
SPY
The common argument for time in the market is that if you missed the 'best days' in the markets, you will get very bad returns.
This is true. Based on a research by the University of Michigan, a buy and hold strategy will yield 10.84% returns per year (between 1963 to 2004). But if you tried to time the market and missed the best 90 trading days, the returns dropped to 3.2%. Therefore so as not to miss the best days, the advice is "time in the market" or stay invested.
But they left out the fact that if you missed the worst days, your returns are even better. The same study showed that if you missed the worst 90 days, you would have achieved 19.57% returns per year over the same period.
Hence in this case, "timing the market pays better than time in the market". This is because missing the worst days are better than investing through the best days.
Lets consider some examples.
SPY
Buy and hold
Assume you bought 100 shares of $SPDR S&P 500 ETF(SPY.US$ at USD323 in Feb 2020 and then the market crashed. So you waited for the market to recover and sold at USD340 in Sep 2020. So your profit is USD1,700.
Market timing
Assume you bought 100 shares of $SPDR S&P 500 ETF(SPY.US$ at USD323 in Feb 2020 and cut loss at USD307 for a loss of USD1,600. Then you used TA to buy 100 shares at USD220 in Mar 2020 and sold at USD340 in Sep 2020 for a gain of USD12,000. Total profit is USD10,400.
Hence, you made more profit timing the market.
Intel
Assume you bought a tech stock which tracked $Nasdaq Composite Index(.IXIC.US$ at the the height of the Dot-Com Boom in 2000. From the chart below, the index didn't recover to its ATH until 15 years later.
Assume you bought 100 shares of $SPDR S&P 500 ETF(SPY.US$ at USD323 in Feb 2020 and then the market crashed. So you waited for the market to recover and sold at USD340 in Sep 2020. So your profit is USD1,700.
Market timing
Assume you bought 100 shares of $SPDR S&P 500 ETF(SPY.US$ at USD323 in Feb 2020 and cut loss at USD307 for a loss of USD1,600. Then you used TA to buy 100 shares at USD220 in Mar 2020 and sold at USD340 in Sep 2020 for a gain of USD12,000. Total profit is USD10,400.
Hence, you made more profit timing the market.
Intel
Assume you bought a tech stock which tracked $Nasdaq Composite Index(.IXIC.US$ at the the height of the Dot-Com Boom in 2000. From the chart below, the index didn't recover to its ATH until 15 years later.
Now assume that the stock was $Intel(INTC.US$. It rose to a very high valuation before the Bust. From the chart below, you can see that it has not returned to its ATH in 2000 even after 22 years. So you are still making a loss after all these years.
Hence, in the examples above, you can see that "timing the market is better than time in the market".
$S&P 500 Index(.SPX.US$ $FTSE Singapore Straits Time Index(.STI.SG$ $SIA(C6L.SG$ $AEM SGD(AWX.SG$ $SamuderaShipping(S56.SG$ $Jiutian Chemical(C8R.SG$ $Rex Intl(5WH.SG$ $RH PetroGas(T13.SG$ $Golden Energy(AUE.SG$ $Geo Energy Res(RE4.SG$
$S&P 500 Index(.SPX.US$ $FTSE Singapore Straits Time Index(.STI.SG$ $SIA(C6L.SG$ $AEM SGD(AWX.SG$ $SamuderaShipping(S56.SG$ $Jiutian Chemical(C8R.SG$ $Rex Intl(5WH.SG$ $RH PetroGas(T13.SG$ $Golden Energy(AUE.SG$ $Geo Energy Res(RE4.SG$
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LEng LEng : Good advice
bullrider_21OP LEng LEng: Thx.
High Profit Low Loss : Provided we time it accurately to long a stock and sell it at its peak. Nothing beats this perfection.
bullrider_21OP High Profit Low Loss: That's why we use TA to determine the buy and sell prices.
protraderx : As an very active day trader and investor, I will say:
1. The quote "Time in the market is more important than timing the market" came from non-trader mindset because they don't have the real world trading skills to time the market. But they forgot, time in the market is also huge risk due to extremely huge stop losses by the time you realise and couldn't take it anymore and this is huge risk.
2. Having said point 1, I also would add, trading in and out frequently is easy said than done because emotion is not easy to control. Even day trader with 40 years of experience cannot control their emotion. Secondly traditional text book TA don't work especially in day trading.
You need to find your own technical method that suit your risk profile and emotion.
So the idea that emotionally hard to trade is not just apply to trader. I think it applies even more to long term investors due to huge lagging response or lack ability to read price action.
Even when one can read price action, emotion will make us extremely hard to implement.
Emotion is a killer and affect both: traders and investors.
I want to add, the best trader out there are day traders....the learning curve of reading market psychology and price action are a lot faster than swing traders or investors.
Market crashes are the time where the fastest big money van be made....shorting.
High Profit Low Loss protraderx: True, putting up for a trade is simple but the process is not easy.