The Ride and the Returns: Embracing Time Out of the Market
The debate between "time in the market" and "timing the market" has long been a cornerstone of investment strategy discussions. In a recent article, Willie Delwiche stated, “Both the ride and the returns improve when we set aside fear and take time to be out of the market.” (Delwiche, 2024) We believe that the investment experience (the ride) and financial outcomes (the returns) can be greatly improved by stepping out of the market during severe downturns. This approach helps clients stay committed to long-term investing while easing the stress of the investment rollercoaster.
The Conventional Wisdom: Time in the Market
"Time in the market" is the idea that long-term success in investing comes not from trying to predict market highs and lows but simply staying invested through thick and thin. The logic is compelling: markets tend to grow over time, and staying invested ensures you capture the full extent of that growth. The cost of missing the market's best days—those rare, explosive upswings—is often cited as a major risk of trying to time the market.
The chart below illustrates this concept, showing how even missing a few of the market's best days can significantly erode long-term returns. They promote the idea that staying the course, even during volatile periods, is the most reliable path to growth.
The Case for Taking Time Out
However, there is another side to this story, one that acknowledges the emotional and psychological toll that constant market participation can take. Investing is not just about the numbers; it’s about the ride—how we feel and behave during that journey. Market volatility, uncertainty, and the fear of losses can lead to stress, poor decision-making, and even burnout.
Taking time out of the market doesn't mean abandoning your investment strategy or trying to predict every twist and turn of the market. Instead, it can mean recognizing when your emotions are clouding your judgment and stepping back temporarily to regain perspective. This could involve moving to cash or safer assets during particularly turbulent periods, not out of fear, but out of a measured response to your emotional state and financial goals.
The following chart, which investors rarely see, shows how performance would look if they avoided the market’s worst days, rather than just focusing on missing the best days. However, it's well-known that the best and worst days often occur close together during times of heightened volatility. So, if we miss some of the best days, we're likely missing some of the worst days too ultimately enhancing your long-term return. (Delwiche, 2024)
Balancing the Ride and the Returns
Stepping out of the market at strategic moments can also lead to better long-term outcomes if done thoughtfully. By preserving capital during downturns and re-entering the market when conditions stabilize, investors can potentially improve their overall returns. This approach requires discipline, self-awareness, and a well-defined plan for when and how to re-enter the market.
Moreover, taking time out can help investors avoid the classic pitfalls of panic selling or holding onto losing positions for too long. It allows for a reset, both mentally and financially, ensuring that when you do re-enter the market, you're doing so with a clear mind and a solid strategy.
A New Perspective on Investment Success
The "time in the market vs. timing the market" debate is not just about choosing sides. It’s about finding a balance that works for you, one that considers both the financial and emotional aspects of investing. By setting aside fear and allowing ourselves to step out of the market when needed, we can potentially enhance not just our returns but also our overall experience as investors.
Adjusting your equity exposure based on market trends—by increasing it during strong trends and reducing it during weak ones—is a viable strategy. This approach can help you largely avoid both the market's best and worst days, especially if you use quantitative, data-driven, technical indicators to guide you through volatile market conditions.
In the end, it's not just about the destination—it's about the journey. And sometimes, a well-timed break can make all the difference in both the ride and the returns.
Interested in implementing this approach towards your own financial goals? 👇
Check out our Advance & Defend Strategy!
Sources
Delwiche, W. (2024, August 22). Time in the market vs time out of the market. Hi Mount Research. https://himountresearch.substack.com/p/time-in-the-market-vs-time-out-of
Maverick Wealth Advisors provides all investment advisory services through Concurrent Investment Advisors, LLC, an SEC Registered Investment Advisor. Concurrent Investment Advisors d/b/a Maverick Wealth Advisors are not affiliated companies.