3 reasons why time – not timing – is your best friend on financial markets

A common obstacle to beginning investing is that people put too much value into when to enter the market. But data indicate that it’s better to be invested for a long time than to try to time the market. Here’s three reasons why.

1. The power of compounding

Compounding returns is the bedrock of long-term investing, and its value is often underestimated. When you invest, your earnings generate their own earnings over time. This snowball effect is most potent when investments are left to grow uninterrupted. 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. This is an annualised return of 11.1%. So if you have a long investment horizon, it’s better to allow your savings to do their thing on the markets instead of pausing to find the right time to enter the market.

“It may not seem like a big thing at first, but the compounding effect over time is significant. So, and this cannot be understated, the most important thing in relation to investing is to get started. None of us are able to time the market anyway,” says Peter Garnry, Chief Investment Strategist.

2. The risks of timing the market

Apart from compounding interest working in your favour over time, there are several other reasons why time beats timing. The first – and arguably most obvious – is that timing markets 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 you can.

“A very important point in relation to the idea of timing the market is that if you miss out on just a few of the good days, your return over time can suffer exponentially,” says Garnry. Also, 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 S&P 500 from 1991 to 2024:

The data above show that 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 halved your entire return.

“The point is that of course we would all like to avoid the worst days in the markets, but missing the best days is also very risky, and manoeuvring in and out of the market at the right time seems almost impossible. So the most salient approach seems to be staying invested as long as you have a long time horizon,” says Garnry.

3. Get started and focus on something else

Missing the best days is, of course, a funny construct because big swings in stocks come around the same time period. Missing the best days probably means that you miss the worst days as well.

Another way to understand why time is more important than timing is by looking at your return since a starting year, comparing investing at the high (worst entry) or bottom (best entry) of that year. The table below shows annualised returns in US equities from a given starting year until today based on the best and worst entry.

There are several conclusions we can draw. One of them is that in most normal years, the difference between perfect timing and complete unluck is only around 1% annualised. Another conclusion is that when you do have a year with big swings or declines, the timing can make a difference, but being able to time the market is extremely difficult if not impossible.

The far more important lesson is that as you stretch out the time horizon to 30 years, the difference between perfect timing and complete unluck is very small. In our case, only 0.3% annualised (as evident from the different between best and worst entry in 1994 – 30 years ago).

In general, the differences are so small that as an investor you should not overcomplicate when to invest. It is better to find cheap passive equity index funds and then make a plan for consistently investing your savings. “Unless you get lucky and hit the market at rock bottom, timing means very little because you postpone getting started, waiting for an event that might not happen and miss returns along the way. So instead, spend time finding the right investment for you – preferably at a low cost – and just do it,” says Garnry.