The greatest asset in your 20-30s? Time ahead

For young investors in their 20s and 30s, the financial landscape has become increasingly complex. Faced with a persistent cost-of-living crisis, sticky inflation, and a competitive job market, many in this generation may no longer view investing as a hobby or luxury, but as a necessity to secure a sound financial future.

However, this economic pressure might cause the perception that the financial world is a race that must be “won”, possibly leading to the belief that one must find the “perfect” moment to strategically enter or exit the market to maximise every opportunity of success. This strategy is known as “Timing the Market”.

Does the “perfect” moment actually exist, and does this approach lead to better outcomes? Historical data tells a different story. The real edge for a young investor isn’t found in a perfectly timed trade, but in the discipline of “Time in the Market”.

In this article we’ll analyse these concepts by moving beyond the numbers, exploring insights from behavioural finance to understand why we are hard-wired to try to “beat the market”, and how engaging in frequent trading can often hinder long-term compound growth.

Defining the strategies

The world of finance is often filled with complex jargon. Before we dive deeper, let’s first clarify what these two philosophies represent

• Timing the Market this is an active strategy where an investor attempts to predict future market movements. The objective is to “buy low and sell high” by making trading decisions based on economic indicators, technical analysis, or even gut feeling. A “Timing the Market” approach presupposes that the market is “inefficient” – that the investor has spotted a trend or mispricing that the rest of the market participants have missed. This ethos poses itself in contrast to the Efficient Market Hypothesis (1970) developed by Nobel Prize winner Eugene Fama, which posits that market prices fully reflect all available information at any given time.

• Time in the Market this represents a passive, long-term approach, often referred to as “buy and hold”. It focuses on staying invested throughout market cycles, relying on the historical upward trajectory of the global markets and the exponential power of compounding. The ‘Time in the Market’ view aligns more closely with the Efficient Market Hypothesis, suggesting that anyone who successfully times the market is simply experiencing a statistical anomaly which cannot be consistently replicated.

Why do people try to time the market?

While the desire to time the market might stem from a simple, logical intention – to maximise returns by participating only in the market’s upside while exiting before a downturn occurs – behavioural finance suggests that this choice is often a byproduct of cognitive bias and deeply ingrained psychological drivers

• Loss aversion Prospect theory (1979) suggests that individuals perceive losses and gains disproportionately, i.e. the psychological impact of a $1,000 loss is often more significant than the joy of a $1,000 gain. This asymmetric assessment may therefore lead individuals to sell their investments during a market downturn to protect their hard-earned capital from further perceived threats, possibly representing an instinctive mechanism underpinned by our inherent inclination towards loss aversion. 
• The search for certainty In 1975, Harvard psychologist Ellen Langer identified the Illusion of Control as the tendency for people to overestimate their ability to influence events that are objectively determined by chance. In an age of sophisticated trading apps and 24/7 financial data, this bias may lead investors to believe that if they study the charts long enough, they can influence their outcome. Consequently, the “perfect” entry and exit point may be perceived as something that can be determined and controlled, rather than as a matter of statistical probability.

What actually happens?

While the original intention is to protect wealth, engaging in market timing can often be counterproductive. According to research from Morgan Stanley, many investors struggle with poor market timing – buying in after prices have already peaked and liquidating positions during periods of volatility. This causes investors to miss out on significant recovery gains, as the market’s most volatile days – both positive and negative – have been found to take place in close succession. In order words, by trying to avoid a crash, investors frequently miss the subsequent rebound, as shown below.

Days with large price changes tend to cluster together

The following chart illustrates how the financial impact of missing the “best days” in the market can quickly become substantial, possibly framing “Timing the Market” as a risky and costly strategy. 

Annualised total returns of S&P 500 (1990 – 2018)

When is the best time to re-invest?

Let us assume that an investor manages to successfully exit the market before a downturn. In this scenario, they would immediately face a new dilemma when is the best time to re-enter? Timing the market effectively requires being right twice, further reducing the chances of replicable success especially if adopted as a long-term strategy.

According to Morningstar’s Mind the Gap study, the “average investor” is often found to earn significantly less than the funds they are invested in (see below). This adds validity to the notion that active investors may ultimately exit the market after a significant drop has occurred and only re-enter until a recovery is well underway, as the feeling of “certainty” often arrives after prices have already recovered.

Annual investor returns and total returns of US Open-End Funds and ETFs – 10 years through Dec. 31, 2024

In addition, frequent trading may also introduce additional elements of consideration transaction costs (depending on the platform) and taxes (depending on the investment wrapper), both of which can potentially hamper the compounding effect of your capital. 

Goals as anchors during turbulent times

According to Shefrin and Statman’s Behavioral Portfolio Theory (2000), as well as the broader field of behavioural finance, investors who establish clear, well-defined goals before they begin investing – such as a home deposit or retirement – exhibit higher discipline and are much more likely to stick to their original plan during periods of market volatility. Assigning a specific label to various investment “pots” creates a psychological barrier that makes it harder to sell impulsively during periods of “market noise”. Indeed, investing with a set objective allows individuals to shift their focus away from short-term fluctuations and towards the goal’s overall progress. In turn, this may help endure the “bumpy rides” without making reactive investment decisions which, as outlined above, could prove rather costly. 

Conclusion

In your 20s and 30s, your greatest asset is the time you have ahead of you. While the pressure of a cost-of-living crisis and sticky inflation can make it feel like you need to “outsmart” the market to get ahead, the evidence cited in this article seems to converge on a common concept time in the market is the most reliable path to success. 

Through our robust investment solutions, our team specialises in offering exceptional client service and professional financial guidance to help you build an investment plan tailored to your specific life goals and risk preferences. If you would like personalised guidance to help you achieve your holistic financial aspirations, you can book a free appointment to talk through your financial situation.

Please remember that when investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The views expressed here should not be taken as a recommendation, advice or forecast. If you are unsure investing is the right choice for you, please seek financial advice.