Most investment analysts and advisors tell you, “Don’t try to time the market”. And in the same breath they suggest a systematic investment plan (SIP) – the idea being that you invest the same amount regularly so that you don’t have to time the markets.
Why are they so much against timing the market? Because they don’t believe that you, a lay investor, have anything to gain by timing the markets. Some studies like this one from Fidelity suggest that the difference between timing the market accurately, and not timing it at all provides very little difference. It actually says that if you invested in the market at the ABSOLUTE top versus at the ABSOLUTE bottom of every year, continuously for 22 years, and compare the two investments, you will get: 8.6% p.a. for investing only at the tops (meaning you got it at the worst possible time) and 11.5% if you invested at the yearly bottoms (best possible time). This is a “small” difference, says the Fidelity paper.
But is it really a small difference?
If you invested Rs. 50,000 per year for those 22 years, investing at 8.6% would give you Rs. 29.9 lakhs. And investing at 11.5%: Rs. 43.3 lakhs. A difference of 13.4 lakhs is a lot of money (considering that 50,000 over 22 years is only 11 lakhs!)
Also this is a UK based research. Let me show you this research using Indian data over the past 11 years (I think after 1992 is when the real story happened, and the first few years were just finding our feet). If I consider the nifty as a benchmark and think of it as the NAV of a mutual fund, my investment every year will be based on the Nifty value and I will get so many “units”. These units then added up and multiplied by the current value of the nifty gives me my current value and thus, I can track my growth. Here’s what I have found.
In India, timing the market at the absolute highs versus the absolute lows yields a return of 15% versus 23%. This is a HUGE difference of 8% and as you can see above, the yield of an investment of just Rs. 12,000 per year can be 2.96 lakhs (bad timing) or 4.57 lakhs (good timing). A difference of Rs. 1.6 lakhs, for a total investment of Rs. 12,000 x 11 years = Rs. 1.32 lakhs.
Now you might think this is silly because no one can accurately predict the highs, no? Right now your advisor will probably be smiling if he’s next to you and saying, “Okay boss, but how will you know the market is at a top or bottom? What if you miss them?”.
I agree that most people will not be able to predict tops or bottoms, but you, the smart investor, will know when the market is severely overvalued or undervalued in a year. So let me assume that you will miss the TOP 10 days of a year and the bottom 10 – that means instead of investing at the yearly high you invest at the 11th highest value instead. Versus, instead of investing at the yearly low, you invest at the 11th lowest value instead. what happens?
As you can see, the difference is still 6% – 22% for good timing, 16% for bad timing. This translates to a difference of Rs. 1.32 lakhs for 11 years of 12K per year – which is exactly the amount you invest in those years put together. Meaning: timing the market can yield you 100% of your investment back!!!
I have mentioned earlier that SIPs have a problem: that you can’t time the market by investing more when you think the market is down. It is demonstrated here with data – if you were able to invest at the lows or even somewhere near the lows over the last 10 years, you would perhaps be a much richer investor.
Timing is not a bad thing – in fact, timing can make the difference between a mediocre investor and a smart one. When you understand that, you will want to learn more about how to determine when the market is low or high. But that is another day, another blog post. (In short, look at the P/E movements, and compare it to last 4Q earnings growth – at the highs versus the lows in the past)
And yes, please send me your comments!
