Why time in the market beats timing the market, in three charts

Everyone knows the advice: don’t try to time the market. Fewer people have seen just how expensive getting it wrong can be. We pulled decades of returns data to show what waiting actually costs.

The temptation to wait is understandable. Markets fall as well as rise, and no one wants to buy in the day before a downturn. Headlines make it worse. There is always a reason to think the next month will be a better time to start than this one, whether it is an election, an interest rate decision or a company’s earnings. But the data on what happens to people who wait is consistent, and it points in one direction.

Below are three ways of looking at the same idea. None of them require a finance degree, and all of them lead to the same conclusion.

Chart one: missing the best days

Take a broad stock market index over a twenty-year period and imagine three investors. The first stays invested the entire time. The second misses the ten best trading days. The third misses the twenty best. Out of roughly five thousand trading days, those are tiny numbers, and it is easy to assume the difference would be small.

It is not. Across long stretches of market history, a large share of total returns arrives on a handful of days. Missing just the ten best days over two decades has historically cut the final value of a portfolio roughly in half. Missing the twenty best has cut it by far more than that.

The cost of being out of the market on its ten best days, over a long enough horizon, can be half your total return.

The obvious response is that a careful investor would also avoid the worst days. The problem is that the best and worst days tend to arrive together.

Chart two: the best days sit next to the worst

If you plot the largest daily gains and the largest daily losses on the same timeline, they cluster. Most of the market’s strongest days in the last few decades happened during periods of crisis, often within a week or two of its steepest falls. Sharp drops are usually followed by sharp rebounds, and nobody rings a bell to announce which one is coming next.

This is the trap in timing. To benefit, you have to be right twice: once when you sell and again when you buy back in. An investor who steps out after a bad day to avoid further losses is very likely to miss the recovery that follows. By the time things feel safe again, prices have often already moved higher than where they sold.

Professional fund managers, with large research teams and real-time data, struggle to do this consistently. Most studies of actively managed funds find that the majority fail to beat a simple index over long periods, and market timing is one of the main reasons why.

Chart three: waiting for a dip

A gentler version of market timing is waiting for a dip. You intend to invest, but you would like to do it at a better price. To test this, compare two investors who each have the same amount to put in every year. One invests on the first trading day of each year, no matter what. The other waits and invests only at the lowest point of each year, with perfect knowledge of when that will be.

Perfect timing does win. What is surprising is by how little. Over several decades, the perfect timer ends up only modestly ahead of the investor who just put money in on day one. And a third investor, who kept waiting for a dip that never came and held cash instead, ends up far behind both of them.

In other words, even flawless timing, which nobody has, adds relatively little. Being out of the market while you wait costs a great deal.

What to do instead

The alternative is unglamorous, and it works: invest regularly, automatically, and leave it alone. Recurring investments smooth out the entry price over time, because a fixed amount buys more shares when prices are low and fewer when they are high. This is often called dollar-cost averaging, and its real benefit is behavioural. It takes the decision of when to buy out of your hands entirely.

In our own customer data, setting up a recurring investment is the single behaviour most associated with good long-term outcomes. Customers who invest on a schedule are less likely to sell during market falls and more likely to still be invested years later.

A few practical steps

• Decide on an amount you can invest every month without needing it back in the short term
• Set up a recurring investment on a fixed day, ideally shortly after you are paid
• Choose broad, diversified funds over individual stocks for the core of your portfolio
• Keep an emergency fund in cash so you are never forced to sell investments at a bad time
• Check your portfolio less often. Monthly is plenty, and quarterly is fine

None of this removes risk. Investments can lose value, and past performance is not a guide to the future. But it reframes the question from “when should I buy” to “how long can I stay invested,” which is the one most investors can actually answer.