Time and Timing: Mastering Strategic Investments

Time has a lot to do with asset valuations. From how long will you be borrowing money for, to how long you hold a stock or option contract before you sell it, time is a critical variable.  Timing, on the other hand, has more to do with when you buy or sell. Do you buy today and sell in two weeks?  Let's explore why we care about time and timing, the key concepts, and how it works.

Timing impacts whether we will enjoy the price appreciation up, and avoid the drop down.  In other words, are we invested in the S&P 500 on the arbitrary 10 days of the year that produced the lions share of the years’ gains for the S&P?  Or did we miss those 10 days sitting in cash or an alternative investment instead?  According to research published by JP Morgan, with data covering the S&P 500 index total return from January 1, 2003 to December 30, 2022, $10 full invested would have produced $64.84.  Miss the 10 best days, you would have received $29.70. Miss the best 20 days and you have only $17.82. Miss the best 30 days and you would be looking at $11.70.  Let fear take over for the best 60 days, and we would have lost money with only $4.20 left after nearly 20 years.   

Time is the number of sessions or days upon which we will be in a particular asset. In other words, the 10-year US Treasury yielding 5% will take me 10 years for the payoff.

Financial publications and economics text books mention the concept of the time value of money (TVM).  TVM is the principle that money available now is worth more than the same amount in the future as the money today could theoretically be invested to earn interest or appreciate.  TVM impacts most financial decisions and is the classical basis upon which key variables such as inflation, risk and opportunity cost are derived using the amount invested, the rate of return and the time frame. 

To illustrate how TVM works, let’s save you have $10 invested for one year at 10% interest compounded annually. Using the TVM formula, we can calculate the Present Value (PV) is $10, while the Future Value (FV) is $11.

Another way to look at this would be if you loaned your little brother $4.63 to buy a Starbucks frozen pumpkin drink on Halloween 2023, at 7% compounded annually. Come Halloween 2024, one year later, your little brother owes you exactly $5.00.

So time is a critical factor in how long I will need to wait for the stock or option to appreciate towards my target value. It is critical because instead of investing in that stock or option, I could have invested in a debt instrument like a US Treasury, and enjoyed a guaranteed nominal interest rate.  

Some key takeaways:

1. Timing is impossible to get right 100% of the time; therefore use position sizing to reduce risk but avoid being 100% out of the market in the event we miss the critical days that generate the year’s gains.

2. Time should produce a positive return but beware that is not always the case; TVM does not account for losses in capital or negative interest rates