Timing the Market vs Buy and Hold: Things to Consider


02 May
02May

Should I try to time the market or shall I hold an asset for the long term? This is one of the most common questions asked by millions of people these days. I know I am asked this often. I’ll just say there are two sides to this debate. Most financial Advisors believe that timing the market is a bad idea. Still, the financial media and analysts seem to consistently encourage it. In this article, we will look at both the investment philosophies.

 What is Buy and Hold Investing?                                                        

Under buy and hold investing, an investor may want to use an active strategy to buy securities or funds and then hold them for a certain period of time regardless of the fluctuations in the market. The majority of my clients fall into this category. We rely on fund managers whose entire job is watching and making trade decisions. An investor who uses buy and hold strategy actively selects investments but has no concern for short-term price movements. Moreover, these strategies are often considered to be passive in nature. Some adjustments may need to be made over time due to events that come up in life, but for the most part it stays in the strategy that matches the investors’ risk tolerance and time frame until they plan on taking withdrawals. 

What is Market Timing? Market timing is the act of predicting when the market will be more profitable and investing in it accordingly. Furthermore, market timing is the main element of actively managed investment strategies and a basic strategy for traders. Fundamental, Technical, Quantitative, or Economic Data are some predictive methods for guiding market timing decisions. Most of the investors and financial professionals often believe that timing the market is almost impossible, and it’s extremely risky at the same time. However, some active traders strongly believe in this strategy. If you are one who had the time and energy to do your research this may be appealing to you. If you are one who has read something and have a fear of missing out without any kind of statistical data analysis, I would equate this type of investing as a form of gambling. You could win big, but you could lose everything as well. 

Does Timing the Market Work? 

Timing the Market may initially seem to be a variant of the famous saying 'buy low, sell high,' but we can’t deny accepting the fact that the future is uncertain, and sometimes stock prices may change rapidly. As a result, it becomes difficult to accurately and consistently determine when a security has hit its lowest or highest point." Moreover, predicting the future can be financially risky, and experts never recommend timing the market. From my own experience many people I have spoken to (clients and potential clients) who have dabbled in this, use more of their emotions to make decisions than a researched strategy. Had they stayed in their existing diversified portfolios, they would have fared better in the market. Many of them sold too soon, and bought too high costing them better returns. 


Buy and Hold is the Secret to Long-term Wealth 

Buy and Hold Investments don't involve short-term predictions. And this strategy proves that time and patience in the market give a higher return than a quick sale. And, by spending time in the market, an investor rides out the natural market cycles. For example, consider an investor holds a stock for 10 years. The positive effects of compounding and investment growth will reap notable rewards. As a result, patient investors earn more profit by allowing their investments to grow over time. It might be difficult for some people to invest that much time in the market. They should remember how it aligns with their financial goals. Maybe they know that they'll need the money for retirement or buying their dream home. By waiting for steady growth over time, savvy investors can achieve their long-term financial goals, as outlined in their financial plan.

Photo by Anna Nekrashevich from Pexels

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