Just like human beings, the stock markets too have its ups and downs – maybe more often. Recently, the market tumbled down like a pack of cards when the pandemic hit the globe. This had resulted in panic selling among many investors. However, the recovery was swift and prices did eventually bounce back, in fact at levels even higher than pre-Covid times. Those who stuck through the turbulent times saw their portfolio in green but were in a fix whether to book their profits or wait for the market to rise even further. This brings up an important question – timing the market or time in the market. But first, let’s understand the difference between the two.
Timing the market follows the “Buy low, sell high” prophecy. It takes the form of speculation which is nothing but betting on the future market direction and positioning the trades accordingly. On the other hand, time in the market focuses on the investing process of selecting a quality asset with sound business fundamentals and holding it for the long term, regardless of the market movements that happen in between. Well-renowned investors like Warren Buffett, Radhakishan Damani and Rakesh Jhunjhunwala share a common belief in the power of long-term investing.
Why does time in the market work better than timing the market?
No one has a crystal ball: Stock price movements are random and unpredictable – especially in the short term. One never knows when the market will bottom or peak. So, for retail investors who have limited access to sophisticated forecasting tools, simple long-term investing can help smoothen the vagaries of the market.
It’s expensive: Repeated buying and selling of securities during peaks and troughs come at a cost. Transaction costs such as fees and taxes add up over time and make a significant dent on investment returns.
Time consuming: In timing the market, one needs to get involved with the market movements and company stock prices which fluctuate wildly at a short-term level. This can be tedious especially for the hustlers of today. Instead, in the long-term approach, investors can invest whenever valuations are attractive and trust the effect of compounding to provide returns.
Miss out on multi-baggers: Just focusing on the timing makes us lose sight of the big picture and eventually end up losing out on the big winners. For example, Bharat Airtel went public in 2002 at Rs.38 which later dipped to Rs.22. Many sharp traders bought the dip and even booked gains of 30% to 40% over the next few months. But was it all that smart? In the next 5 years, the stock actually appreciated by over 45 times – a huge win for those who remained invested in the stock.
So, is timing the market only a gimmick?
To understand this better, let’s assume you had made the ultimate mistake of investing money only when the stock market hit all-time highs.
Say, you invested Rs. 10,000 in each of the all-time high months in a NIFTY 50 Index Fund from 2000 till 2020. Since there were 55 times when the index hit a lifetime high, you would have invested a total of Rs. 5.5 lakh in those 21 years. Assuming you held on to the securities, the investment would have grown by 10.8% to Rs. 17.5 lakh as of December 2020. If we include dividends received from the Nifty 50 companies, the annualized returns increase even further to 12.3%. per annum – which is quite decent despite your timing mistake.
NIFTY 50 Index (2000-2020)
Timing the market to perfection does have its shortcomings, but one can still benefit from rallies and crashes. But only timing won’t work. The invested money must also be given sufficient time to compound. Thus, a combination of timing and time in the market can provide the required returns for investors.
If you are keen on timing the market and want to know where to park your funds, click here.
SIPs – Best of both worlds
Investing in Mutual Funds or ETFs with Systematic Investment Plans (SIP) help in timing the market and creating value at the same time. The SIP provides the benefit of Rupee Cost Averaging (RCA). This indirectly helps in timing your trades and lowering your overall cost of acquisition as you will automatically buy more units when markets correct. And when you continue with a SIP for a longer period, you invariably tend to earn above-market returns.
To learn more about investing in SIPs, click here.
The bottom line
It is crucial that you begin the investment process with a clear idea of your financial goals and the time horizon to accomplish them. This will help broaden your perspective of investing to the extent that the ultimate aim is not to ‘beat the market’ but to earn returns that fulfill your personal goals.