Why Timing The Market Doesn’t Work
The biggest reason why “timing the market” doesn’t work as an investment strategy is simply because that past performance is not an indicator of future success. The stock market often behaves like the weather. Over many cycles (or seasons) you will see trends emerge - but it is never certain. You can anticipate that temperatures will drop during the winter months, but you cannot account for the exact day-to-day conditions. Short-term trading is spending every day trying to predict the weather.
According to multiple studies, only 1%-3% of day traders are consistently profitable. Is it possible to make money with short-term trading - yes. Is it easier and less risky to choose disciplined long-term investing - yes.
Long-term investing works because over time, the peaks and valleys of the market even each other out, leaving you with consistent, albeit slow, growth. Long-term investments compound over time, producing consistent returns for retirement. Historical data shows that holdings from the S&P 500 over 20 years are 100% likely to create a positive return.
How To Switch From Short-term Trading To Long-term Investing
If you are used to the fast pace of day-trading or looking for penny stocks that are about to pop in order to make a quick score, long-term investing may feel boring. However, when you are moving to disciplined long-term investments, there are some very real benefits:
Reduced volatility
Short-term or day trading may provide a thrill, but can also subject you to big losses - with long-term emotional and financial impacts.Passive time commitment
Often short-term investments require more monitoring and decision making, taking away from time you could be doing other things. Long-term investing is generally more passive, as you benefit from letting your investments grow untouched.Lower tax liability
Short-term gains are often taxed at income tax levels, which can reach 37% depending on your tax bracket. Long-term holdings are subject to lower tax bracket levels, topping out at 20%, leaving you with more money in your pocket.
Long-term investing relies on consistency and compounding to produce results. While you may need to adjust your expectations and timeline for hitting certain financial milestones, you will have significantly reduced your risk. This strategy also allows you time to rebound if you suffer financial losses from poor investments or an economic downturn.