Time in the market, not timing the market
If you’ve ever jumped into the world of personal finance blogs, you’re going to run across this phrase: “It’s all about time in the market, not timing the market.” Let’s break that down, because it runs counter to what intuitively feels like a good investment strategy.
“Time in the market” refers to how much time your money is invested in the stock or bond markets versus how much time its sitting around as cash. When your money is invested, it has the opportunity to create more wealth for you from capital gains (increases in the value of the investments), dividends (payouts from corporations to their shareholders), or interest income (payments made to bondholders while bonds are outstanding).
Over the last 90 years, stocks have returned about 7% after inflation(1), and bonds have returned 2–3% after inflation(2). Compared to even the highest-yield savings account rates you might find at banks which are ~0% after inflation (~2% nominal yields as of this post), that’s a substantial boost to return. To put in sharper perspective, it’s the difference between turning $100,000 into $760,000 over 30 years versus letting it just stand still by leaving it in a bank account.
What about now?
Clearly it’s a good move to invest your money, but is now the right time? What if a recession strikes tomorrow, next month, or later this year or next? What if we’re in a down market — could things get worse? Those are scary thoughts, so let’s take a look at the risks you take on by trying to “time the market.”
