Time in the markets

The one who regularly buys the market low and sells the market high is a liar.

— An Old Adage

For ages now, investors have been lured by the myth called - timing the market.

In this analysis, we plan to present various empirical pieces of evidence which will aim to settle this debate that time in the market is more important than timing the market.

Let’s have a look at the journey of BSE Sensex for the past 10 financial years (FY14-FY23). During this period, there were 2,476 trading days. Had you invested on April 1, 2013, and stayed invested without caring about the market fluctuations till March 31, 2023, you would have comfortably made a return of 12.1 percent per annum. However, had you preferred the adventure of trying to buy the lows and sell the highs regularly (read trading) in the name of booking out profits over the last 10 years and missed out on just 25 top-performing days because the prices were high to enter, your returns would have been a meager 1.8 percent per annum. It's startling to know that missing out on just 25 days could make or break your portfolio. From the above case, we can confidently conclude that time in the market or staying invested in the market is imperative for wealth creation, and trying to time the market incorrectly may lead to wealth erosion.

We went a step further and checked what would happen if you could consistently time the markets correctly.

Again, to back our analysis up, we took the BSE Sensex data for the past 10 financial years (FY14-FY23). Now let's consider three individuals – Mr. Fortunate (always invests at the bottom of the market in a given year), Mr. Disciplined (invests on a given date every year), and Mr. Unfortunate (always invests at the top of the market in a given year).

All three of them invest Rs 1,00,000 every year from 2014 to 2023 ie. 10 years.

It is a no-brainer to see that Mr. Fortunate made the highest return among the three. Since the investments were made at the bottom every year, which is only a hypothetical possibility, he outperformed his peers and generated 14.2 percent per annum. But truth be told, it is practically impossible to have as good a fortune as Mr. Fortunate.

On the other hand, if you hadn't applied your brains and would have just invested on the first of every financial year like Mr. Disciplined, you would have generated a decent 12.1 percent return per annum.

And if you were unfortunate that at every instance of your investment you bought at the highest possible price (again practically impossible), you would have still made a decent 9.8 percent return per annum.

Conclusion        

Trying to time the market is not only difficult but also unnecessary. Our objective as investors is to achieve our financial goals and create wealth, and this can be accomplished by staying invested in the market for the long term. By doing so, we avoid the risk of missing out on the market's top-performing days, which can have a significant impact on our portfolio's performance. It's also important to note that mere investing in the markets may not work, regular portfolio reviews with your financial advisor to ensure the portfolio quality and asset allocation helps in optimizing the portfolio performance.

Disclaimer - The views and opinions mentioned above are only for general information and not to be regarded as a ‘recommendation/advice’ towards a course of action. Historical performance indications and financial market scenarios are not reliable indicators of current or future performance. In view of the individual circumstances and risk profile, each investor is advised to consult on their advisors/planners before taking any investment decisions. We’re not advising, suggesting or guaranteeing any returns on any investments made.

Data Courtesy - VR