"Time in the market beats timing the market."
It's an adage we hear all the time as investors. But the way it's presented often feels like a tautology. "If you knew enough to sell at the peak and buy at the trough," they say, "then you might beat the market. But since there's no way to do that, it's better to just invest a little every day."
It makes sense. But that's comparing an impossible scenario to a possible one. Now, it's impossible to know when to sell at the peak. But you can wait for significant lows before you buy. So how does the old advice hold up in a more realistic scenario? And how does it hold up for markets like Bitcoin?
Let's compare 3 different protocols:
- Protocol 1:
a) Save $100 every month
b) If the market is 20% or more below its ATH, put the money in the market - Protocol 2:
a) Save $100 every month
b) If the market is 50% or more below its ATH, put the money in the market - Protocol 3:
a) Every month put $100 in the market
We're going to look at two different markets: S&P 500 and BTC.
Here's a snippet of what the Protocol 2 dataset as an example:
All data and charts here
*Note: we're taking the value of the market on the first of each month. So fluctuations in the middle may not be visible.
If you take a look at the spreadsheet linked above, you'll see that we've been saving $100 a month since May of 2005 waiting for the market to dip 20%. Once the market drops in 2008, we inject $3800+ into the market at a discount rate. Pretty great, huh? The "Total Assets" column tracks how much money we have total (both what's in the market and what's saved and waiting to be deployed into the market). We'll be comparing the "Total Assets" column between protocols to see which protocol does best.
Let's see how these protocols compare:
The blue line is Protocol 1, the red line is Protocol 2 and the yellow is Protocol 3. Protocol 3 is winning by a landslide. At first this may seem a little unintuitive: you're putting more money in when stocks are at a discount using Protocols 1 or 2. You're saving your money for a sale. That should mean more shares of stock, right? The answer is easier to see when you compare solely what's in the portfolio for each protocol.
For Protocol 1, we save up $9700 over the course of 7+ years and then dump it in the market at a "discount" price of 20% off the all-time high on Feb 1, 2001. However, what we're forgetting are the millions of times we could have bought stock even cheaper than 20% the "ATH" that was hit in 2001. By the time Protocol 1 has saved $9700 in Feb 2001, Protocol 3 has already made 24k in the stock market. And bought roughly 70% of its stock at a price cheaper than Protocol 1 did. Under what circumstances would Protocol 1 or 2 work better than Protocol 3? One in which the biggest discount the market would ever give you was 20% or 50% off. Something closer to this:
Here we see a FakeMarket in red compared to the S&P500. Notice that it seems pretty cyclical. Let's compare the protocols now.
It's comical! The lesson here is that if stocks were discounted most and for the longest after a large crash, Protocols 1 and 2 would work. But no such guarantee can be made about the S&P500. We can't even get close. Let's say, for instance, that if stocks are at an all-time high, we save the money and don't buy.
Not buying when it's an all-time high (green line) still isn't as good as just buying every day. This means that you can never estimate when stocks are "too expensive" or "at the best possible discount."
Let's take a look at a slightly less conventional market.
Remember: we're logging the value of the market at the beginning of each month. So BTC's jump and subsequent fall from $20K isn't documented here.
Let's look at Bitcoin.
Here we see a more nebulous chart. There are long slews of mostly nothing-ness. And then a giant spike and drop. How do our protocols compare for Bitcoin?
While it's a close call between Protocol 1 and Protocol 3, Protocol 1 wins by a hair. (Interesting to note that waiting for Bitcoin to drop at least 50% is a significantly worse strategy.)
It looks like no matter how smart you try to go: as long as bull markets are as long and successful as they are, time in the market beats timing the market.
Reminder: All data and charts available here. Find a flaw? Discovered some other interesting insights? Comment!