There are two very famous quotes in investing circles:
- You cannot time the market.
- Time in the market > Timing the market.
Now I would also like to add third rule to the above list:
- Time of the market matters.
In my opinion, time of the market is slightly different than timing the market and time in the market. By time of the market I mean the ability to see where the market is currently i.e bull market, top of the market, bubble, bear market, recession or “near” bottom. Being able to have this skill will play a very important role in deciding how long you can stay in the market and what your returns will be.
So although it is difficult to time the market but you want to be experienced enough to be able to see the time of the market especially if the prices have gone bonkers and if you are top of the pyramid or perhaps there is extreme fear in the market and things are trading at bargain prices. Any investor who experienced the dot-com crash should have been able to call out the Covid Stock / SPAC / Crypto madness.
Timing the market doesn’t necessarily mean finding the bottom. But you definitely don’t want to buy at the top of the bubble and then see your asset fall by 30-40% or even more than 50%. It is one thing to say that you are comfortable seeing your portfolio can experience 10-20-30% drawdown and it is altogether a different thing to experience it in reality. Same goes with the bubbles, bear market and recession. True lessons are learned not by reading about it but by experiencing it first hand.
In a bull market, prices usually go up but in a bubble burst, bear markets or recession it may take many years to recover and in some cases it may never recover. For e.g, it took almost 10 years for AMZN to get back to its dot-com price whereas some stocks like SUN (Sun Microsystems) were never able to recover the dot-com price. Thus it would have been impossible or extremely difficult for shareholders to hold either AMZN or SUN from 2001 to 2009 if they bought it at the top of the bubble.
And this was true even for S&P 500 where it took 7 years for it to go back to go back to dot-com price. It then fell back again during the 2007-2009 recession and then took another 5 years to go back to dot-com highs.
So if you were not able to see the time of the market (in this case bubble of the market) then your time in the market would not have mattered for almost 10+ years even if you were holding SPY.