Time In Market Outperforms Timing Market Amidst Inaction Risks

Key Quotes

"This time is different" is the most expensive lie you will ever tell yourself.

Tyler Gardner argues that the phrase "this time is different" is a dangerous and costly misconception in investing. He highlights that this sentiment is repeatedly expressed during market downturns, yet history shows markets consistently recover and reach new highs. Gardner uses this to underscore the futility of trying to time the market based on perceived unique circumstances.

"The lesson here isn't don't buy individual stocks. The lesson is don't convince yourself you know something about timing the market when you don't. Because the moment you start believing you're smarter than the collective wisdom of millions of investors around the world, all of whom have access to the same information, if not more than you do, you're setting yourself up to fail."

Tyler Gardner explains that the core takeaway from his investment analysis is not to avoid specific assets, but to recognize the inherent difficulty and risk in attempting to predict market movements. He emphasizes that believing one possesses superior market timing knowledge compared to the collective intelligence of the market is a recipe for failure. Gardner suggests that this overconfidence often leads investors to make detrimental decisions.

"Perfect Timing Pete, invested at the absolute market low every single year. Impossible, but let's pretend. Investor number two: Bad Timing Betty, invested at the absolute market high every year. Also impossible, but work with me here, people. ... Guess who ended up with the most money? Perfect Timing Pete, in first with $87,004. ... But here's the surprise: Bad Timing Betty, the person who bought at the absolute highs, or according to many of you, the worst time ever to buy stocks, ended up with $72,487. She still more than doubled her money."

Tyler Gardner presents a hypothetical scenario to illustrate the cost of inaction versus poor timing. He contrasts an investor who perfectly times market lows with one who consistently buys at market highs. Gardner highlights that even the investor with "bad timing" significantly outperformed the investor who remained in cash, demonstrating that simply being invested, even at suboptimal times, is more profitable than not investing at all.

"Missing the best days is worse than experiencing the worst days. Here's a stat that should terrify you: if you missed the 10 best trading days in the S&P 500 of the last 25 years, your returns would drop from 9.9% per year to just 5.6% per year. That's nearly cut in half."

Tyler Gardner emphasizes the critical impact of missing even a few of the best trading days on long-term investment returns. He provides data showing that missing only the top 10 trading days over a 25-year period can drastically reduce average annual returns. Gardner uses this statistic to argue against market timing strategies that might lead investors to be out of the market during periods of significant gains.

"If you invest, you risk having your investments lose value. If you don't invest, you risk having your cash lose value. Sitting in cash isn't neutral. It's not playing it safe. It's an active decision to underperform the market."

Tyler Gardner clarifies that inaction, such as holding cash, is not a risk-free strategy. He explains that while investing carries the risk of loss, not investing carries the risk of losing purchasing power due to inflation and missing out on compounding returns. Gardner asserts that remaining in cash is an active choice with its own set of negative consequences, rather than a neutral or safe position.