Wealth

Time in the market is more important than market timing

Equating time with money is a mistake - how can we focus our investment on long-term wealth creation?

“Remember that Time is Money.” Many of us are familiar with Benjamin Franklin’s first piece of advice to a young tradesman. But does this maxim still ring true some 270 years later?

Experience tells us that equating time with money is a mistake. Franklin’s third piece of advice to the young tradesman explains why. “Remember that Money is of a prolific generating Nature. Money can beget Money, and its Offspring beget more.” Time, on the other hand, is not “of a prolific generating Nature.” Time does not beget Time.


Investing in financial assets can allow people to grow their wealth, which in turn gives them greater flexibility in how they use their time. Protecting that same wealth against financial crises is also important. But many clients think they can beat losses by timing the market and trading single stocks. We find that these factors matter little for long-term wealth creation. Time in the market and a globally diversified investment approach matter most.

Remaining invested in equities as part of a portfolio has been particularly important. In nominal terms, US stocks have returned an average of 9.6% a year, versus 4.6% for ten-year bonds and 3.5% for real estate since 1900. Adjusted for inflation, annual returns on US equities averaged 6.6%, bonds 1.6% and real estate only 0.5% over the same period. And although there were 12 occasions in which equities suffered a more than 20% drawdown, patience over long periods was well rewarded. If you invested all your money right at the top of the dotcom bubble, it took 14 years to make it back in real terms. Most drawdowns were smaller, including that of the Great Depression. If you invested everything right at the top of the market before the financial crisis in 2007, you would have now nearly doubled your money in real terms.

Maintaining the discipline to stay invested through long periods that include equity drawdowns is not easy. The human instinct is to cut losses. However, this can also lead investors to destroy a part of their own wealth, since the returns generated from staying invested have historically beaten the returns generated from trying to time the market. Since 1936, an investor with relatively good market timing (an ability to consistently sell 10 months before a market peak and buy back 10 months after a trough) would still end up worse off (by 19%) than one who remained invested throughout the period.

Remaining invested in equities as part of a portfolio is particularly important.

Time in the market is important to growing wealth over generations. Protecting that wealth involves avoiding irreparable wealth destruction. True wealth destruction events are not necessarily global stock market crashes, like the Global Financial Crisis. True wealth destruction follows events that can permanently impair wealth. Such events can be personal: overspending, a divorce, or financing investments through excessive debt. Historically, the impersonal events that cause unrecoverable loss have fallen into four categories: inflation, war, sovereign default, and revolutions. In each case, investor losses could have been significantly reduced by following a globally diversified investment approach.

Hyperinflations have generally been local phenomena, not global ones. They are typically caused by direct central bank financing of a government’s debt. They often lead to both significant local asset price inflation and real wealth destruction on a currency-adjusted basis. For example, the Venezuelan stock market has risen 1.4 million per cent in local currency terms since 2007, but it has delivered a real loss in US dollars of around 10% over the decade to date. One million Venezuelan bolivars, worth USD 476,190 in 2007, now only buys USD 155.

Wars have consistently destroyed wealth too. Between 1942 and 1945, the German stock market fell 98%. Japanese equities lost 95% in USD terms. And cash and bonds fared little better. In 1948 the Deutsche mark replaced the old Reichsmark at a rate of one new to 10 old, decimating private savings. In more modern conflicts, the Iraqi dinar fell 99.98% between 1990 and 2003.

Germany, 1923: During hyperinflation, banknotes had lost so much value that they were used as wallpaper, being much cheaper than actual wallpaper.

Sovereign defaults can equally lead to near-permanent wealth destruction. Even if Greek equities return 7% a year in the future, they would only regain pre-crisis nominal levels by 2047. Greek government bonds lost 76% of par value in the 2012 restructuring. Investors would need to wait until the mid-2050s to return to par at a coupon of 3%, even after the recovery to date.

Spending time in the market and maintaining a globally diversified portfolio have been investors’ best defenses against irrevocable losses in the past. We conclude that these two factors are critical to successful investing today. And looking ahead, we expect that staying invested and diversifying your investments can help your wealth to weather destruction in the future.

Time does not equal money in today’s world. But with some modification, Franklin’s advice to a young tradesman can serve as advice for all investors:

“Remember (to diversify and) that Time (in the market) is Money.”


By Mark Haefele, Global Chief Investment Officer, UBS Wealth Management