What is Market Timing?

 

Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. Proponents maintain that successfully forecasting the ups and downs of the market can result in higher returns than other strategies. Critics, however, note that changes in a market trend can appear suddenly and almost randomly, making the risk of misjudgment significant. Market timing is an investment strategy that involves going in and out of the market or switching asset classes based on predictions that attempt to measure how to market will move. The problem with this method is that it’s nearly impossible to accurately time the market even by successful Fund Managers across the world.

 

Market timing has its Disadvantages

 

One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments. For example, an investor, believing the market would go down, sells off equities and places the money in more conservative investments. While the money is out of stocks, the market instead enjoys a high-performing period. The investor has, therefore, incorrectly timed the market and missed those top months. Due to some quirk in human nature, we tend to be overconfident in our ability to predict the future. So we end up timing the market. Or at least trying to.

Mutual funds investors frequently try to time their systematic investments in response to the market’s ups and downs. When the market is falling, they stop their SIPs. When it is rising, they increase their SIP amounts. This invariably backfires.

The opposite of market timing is buying and holding as the market goes through its cycles.

Market timers often try to predict big wins in the investment markets, only to be disappointed by the reality of unexpected turns in performance. It’s true that market timing sometimes can appear to be beneficial. But for those who do not wish to subject their money to such a potentially risky strategy, time — not timing — could be the best alternative.

 

Time is Investor’s Best Friend

 

Clearly, time can be a better ally than timing. The best approach to your portfolio is to arm yourself with all the necessary information, and then take your questions to a financial advisor to help you with the final decision making. Above all, remember that both your long- and short-term investment decisions should be based on your financial needs and your ability to accept the risks that go along with each investment. Your financial advisor can help you determine which investments may be right for you.

 

 

Patience while Investing Pays BIG TIME!

 

Investors have been in tough situations in the past, the event that is still fresh in our memory being the 2008-09 Global Financial Crisis (GFC), where markets saw a flip flop ride initially which was finally followed by a swift recovery over medium to long term. Investors who tried to time the market during the crisis would have most likely repented while a patient investor who ignored the noise and remained invested would certainly be counting his fortunes today.

 

The below table shows the Systematic Investment Plan (SIP) of Rs 10,000 per month since 1st April 1998 in the NIFTY 50 Index and their market values during the 2008-09 GFC and after 5 and 10 years.

 

Date	Remarks	Total Months	Total Investment	Market Value(In Lakhs)
Sep 2007	1 Year before Global Financial Crisis	114	11.4	39.84
Sep 2008	Global Financial Crisis	126	12.6	32.06
Sep 2013	5 Years after Global Financial Crisis	186	18.6	53.98
Sep 2018	10 Years after Global Financial Crisis	246	24.6	110.74

 

 

As can be seen from the above table, the market value of SIP decreased from Rs 39.84 lakh to 32.06 lakh during the Global Financial Crisis. However, someone who would have continued their SIPs would have seen their wealth grow to Rs 53.98 lakh as of September 2013 (after 5 years of the GFC crisis) and Rs 110.74 lakh as of September 2018 (after 10 years of the GFC Crisis).

 

Since Last Year we were in a similar situation where the market value of SIP investment which was started 10 years (SIP of Rs 10,000 per month since 1st April 2010 in NIFTY 50 Index) back has seen a fall due to the outbreak of the pandemic and then we are witnessing Market upsurge and Long Term Visibility Looks Very Good in terms of Wealth Creation.

 

 

Date	Remarks	Total Months	Total Investment	Market Value(In Lakhs)
March 2019	1 Year Prior to COVID 19 Crisis	108	10.8	17.9
March 2020	COVID 19	120	12	14.07
March 2025	5 Year After COVID 19 Crisis	180	18	??
March 2030	10 Year After COVID 19 Crisis	240	24	??

 

 

Investors’ behavior becomes important during such times Like GFC, COVID 19, etc as emotions are at a greater play in situations when there is heightened volatility. Investors ‘Greed’ to chase returns and ‘Fear’ to stay away from falling markets usually keeps them at bay during tough times. The result is that the investor ends up sitting at the fence for a long time patiently investing to capture the right opportunity and multifold compounding returns.

 

 

TIME is a superpower. It works well even for the most Unlucky investor!

 

Let’s consider One investor invested only at the wrong time(invested just before any Major Market Fall). He didn’t take his money out after that and withstood all the future declines without panicking out.

This simple but difficult act of patience gave the portfolio a long enough time horizon to let compounding work its magic. While there is a natural tendency to shrug this off given the simplicity of the solution, here is some hard-hitting evidence.

 

Check out the returns of lumpsum investments in Nifty 50 TRI till date when invested right before the major falls of the past two decades.

 

Major Fall >20% Since 2000	Absolute Decline	Nifty 50 TRI Lumpsum CAGR(When invested at Peak Just Before the Fall)	Debt	Inflation
2000 Dotcom Bubble	-50.00%	12.00%	8.00%	6.00%
2004 Indian Election Uncertainty-30%	-30.00%	14.00%	7.00%	6.00%
2006 Global Rate Hike Sell-Off	-30.00%	11.00%	8.00%	7.00%
2008 Global Financial Crisis	-59.00%	8.00%	8.00%	7.00%
2010 European Debt Crisis	-27.00%	10.00%	8.00%	7.00%
2015    Global     Market     Sell-Off(Yuan Devaluation)	-22.00%	11.00%	8.00%	4.00%
2020 Covid Crash	-38.00%	19.00%	8.00%	4.00%

 

 

Summing it up

 

1-As seen above with the help of time even the most unlucky investor ended up with a reasonable outcome outperforming debt funds and inflation.

2-A simple SIP removes the need to time the markets and if given enough time provides a return that is almost as good as the hypothetical lucky market timer (who is difficult to exist in reality)!

3-If you have a long time horizon, a simple SIP in a few good equity funds for the next 10-15 years is all it takes to ensure a good investment outcome.

 

Do not let the inherent simplicity of the solution, undermine its ability to deliver the magic of compounding.