One of the biggest mistakes people make in financial planning is trying to time their efforts. Thinking that you can find the perfect time to sell your house or buy stocks can have disastrous consequences. Instead, financial planners will tell their clients to focus on time rather than timing. Let's look at what the difference is and why it matters so much to your finances.
Time vs. Timing
In the financial planning sense, time is just how long you allow your money to work. At the scale of decades, most people should expect their finances to improve significantly. If they can produce a surplus through earnings at work, they can invest that money into housing, stocks, bonds, and other financial vehicles. These vehicles tend to produce consistent returns at the scale of decades, even if they might experience sharp contractions for a couple of years in some of those periods.
Timing, on the other hand, refers to trying to hit the mark perfectly. It is the extreme form of the buy-low-and-sell-high strategy. Someone who wants to time the housing market, for example, might end up putting off buying a home until a recession hits. Likewise, they might try to sell the house when the market is booming.
Why Time Beats Timing
Compound returns can turn into a sort of self-fulfilling prophecy with sufficient time. If you purchase a stock, it might return 2 percent in dividends and 7 percent in price growth per year. As you reinvest the dividends and see more growth in similar investments, they spawn further growth that can get massive over the course of several decades.
The first problem with timing as an alternative financial planning strategy is that you don't have a crystal ball. You might think you're buying low only to find your strategy ruined as the market decides to go lower.
Secondly, the cost of delaying in the market could still realize a bigger loss than what you may gain even if you're right. If you don't buy a house when you need one, you have to spend money on rent to have somewhere to live, unless you have the good fortune to have rich parents who'll put up with you rent-free. That rent money is gone forever, and it can never grow.
Developing an Approach
From a financial planning perspective, the big thing to do is to be consistent. Put money into assets that will likely realize long-term returns, and do it every pay cycle. Do not freak out whenever the next recession comes and try to dodge the consequences. Start early, and be consistent whether times are good or bad.