Time In the Market vs Timing the Market

Time in the market is so much more important for an investor's long-term returns than timing the market. This is something The Motley Fool takes to heart, because no one can accurately know when to get in and get out. Yet we have services that feature both watch lists and price points to look for, a seeming contradiction to our long-standing opposition to timing the market.

In this segment from the MarketFoolery podcast, Chris Hill, Simon Erickson, and Aaron Bush take a dive into the mailbag and answer a listener question about stock watching, and whether it wouldn't it be best to simply buy into companies you believe in, regardless of their day-to-day price. Listen in to find out why there aren't any concrete rules for investing, and why context is everything for deciding what kind of portfolio is right for you at a certain point in your life.

A transcript follows the video.

This podcast was recorded on June 22, 2016. 

Chris Hill: [email protected] is our email address. From Dan Schmidt in South Korea: "I've been listening to all of the Motley Fool podcasts for about a year now, and learning a lot. One thing I'm still confused on is why your services have things like watch lists or attractive price points for stocks. It seems like a constant theme is that no one can predict or time the market. But isn't waiting for the price of a particular stock to come down just another way of timing the market? Why not just always buy a stock whenever you have the money available, regardless of what the stock is currently trading at?"

Aaron Bush: It's a good question.

Hill: It is, Aaron. What do you think?

Bush: I totally agree with the phrase that time in the market is much more important than timing the market. Generally that tends to be true. But, alas, there are no firm rules here, and context is king in pretty much all of this. For example, there are times where valuations get super lofty. We've seen bubbles through history. There's even more hype on a microeconomic basis, looking company by company. From that fact alone, I think it makes sense to at least be price-conscious. And how you approach this also depends on your investing style. There isn't necessarily a right or wrong answer here.

If you want a more concentrated portfolio, it might make sense to wait until you're very certain that a stock will give you good returns, which could be a totally different philosophy from someone who's younger and it's more willing to take risks, who wants to own more businesses. They'll be OK just buying a company that has good prospects for a decade on. And only after that, when they're looking at potentially making it a larger percentage of their portfolio, would they start thinking about the price more and more. There's a lot of different ways to twist all that.

But I would just say everything is contextual. Thinking about this question through the specific context of your life portfolio and strategy will help you come up with the best answer for yourself.

Simon Erickson: I agree with what Aaron said. What can you model? If you're building a model and you come up with the price target, how sure are you with the inputs that you're putting into that model? And if it's a business like a Starbucks or a Wal-Mart, maybe you can, with a pretty high degree of accuracy, get the inputs correct on a model like that. But if you're putting something like any commerce player, or a tech company, or somebody that's going to sell software, or even social networking -- when Facebook (META 0.14%) first came out, nobody knew how big that was going to be. Something that has the majority of the value of the company in the future that is unknown, you're going to get it wrong. Don't let a price target that's out there for a 12-month forecast convince you to not buy a stock that could have a really really big future.

Hill: I think Dan sounds like one of those people who is at that point in his life where he is taking the approach of, "Hey, if I've got some available money, I want to put it to use right away, and I'm not looking to necessarily get the best possible price." But we have seen that in the past with a variety of different companies, and one that comes to mind is Facebook. When you think about where Facebook was trading roughly eight to 12 months after its IPO. It had dropped down. I remember walking around this building talking with analysts, some of whom were looking at it and saying, "This is nuts that Facebook is trading this low. That's crazy." To me, Aaron, some of the examples that leap to mind the quickest are the ones on the extreme, where a quality company's price has been knocked down on its stock, and you're like, "That's just stupid." And on the flip side it's -- and I don't mean to pick on them -- but it's Shake Shack (SHAK 1.06%) trading at $90 a share, where you're like, "Wait a minute. That's insane that it would be that high." If I were someone who is interested in shorting stocks, that's one that I would short.

Bush: Yeah. Again, I really think it's contextual. It depends on what exactly you're looking at. One thing I would say, though, is, if you're someone who's regularly investing money -- that's me; that's a lot of other people -- you have a watch list because you can't invest in everything at once, also. So you have it to study it over time, look at it over time, so you can figure out at any given time which one you should go for when you have the money. Call it timing, call it something else; you still have to pick and choose.

Hill: And one thing that you've just alluded to is not directly addressed in Dan's question, but is something that I think investors should always keep in mind. That's fees. What are the fees? If you have a system set up where you're not paying high fees, and you can make more frequent purchases, that's great. For a lot of people, there is some sort of transactional fee. It's something you always want to keep in mind.

Bush: Yeah. We normally say the general rule of thumb around here is to keep the fees 2% or less of your trading. I would go a little further to say, you don't have to trade like crazy. You don't need to buy everything. You should at least put some thought into what you're buying, instead of just being like, "Oh, that looks cool, I'm going to buy it because price doesn't matter." That doesn't really work out for you very well. But every context is different. Having a watch list can still be important, I think.