‘Market Timing’ is a strategy where you are trying to identify the best times to be ‘In’ and ‘Out’ of the financial markets. Essentially you are trying to predict the future trends in financial asset prices and based on those predictions, you buy or sell these financial assets (stocks, bonds, mutual funds etc.). Simply put, you want to outperform the market by buying low and selling high.
All of us can get lucky from time to time but it is difficult to consistently time the market. The reason is that what we see as a monolith – ‘the market’ – is composed of lakhs and millions of well-informed and hard-working investors, each of whom is attempting the same thing. To truly time the market well, you need a system that incorporates macroeconomic conditions, company earnings trends, demand for Indian stocks by foreign institutions etc. Most of us don’t have any such system but attempt to time the market based on what our friends are saying or what we read in the newspaper.
What if we shift our approach from trying to time the market, to maximising our time in the market?
In this way of thinking, you would identify a core set of financial investments and hold them forever, only selling when you really need the money. There are huge benefits to this approach – you avoid mistakes because you don’t take too many actions, you benefit from the long-term upward trend in the market and you free up your time & mind-space for other things! When we look at market data from 2002-2022, we find that around 60% of the returns in the stock market came from just 3% of the trading days. It is impossible to tell in advance which days those would be (or else all of us would try to own stocks for just those days), but if you try to predict those days, you risk missing them completely.
Getting fortunate in the markets over the long-term is a foolish goal to have
To further elaborate the point, let’s take an example. Assume there are three people who invest Rs. 1 lakh annually in the stock market over a period of time. The first one, called ‘Fortunate’, is able to tell with perfect foresight the day when the index (Nifty 50) would be at its lowest price in any given year & he invests all his money then. The second one, called ‘Regular’, doesn’t try to find the perfect time but just invests Rs 1 lakh on the first day of every year. The third one, called ‘Unfortunate’, always invests when the index (Nifty 50) would be at the highest point in any given year. At the end of 10 years (using actual market data from 1st Jan 2010 to 31st Dec 2019), their portfolio returns look like this:
Clearly, being Fortunate is great – you would have earned nearly 12% returns over this period – 1.9% more than the Regular investor. However, unless you have perfect market foresight like ‘Fortunate’, you never know for sure if you will end up as Fortunate or Unfortunate when you start making important investment decisions based on timing the market – you are likely to end up somewhere in between. Unless you have a crystal ball, being Regular is the best approach for all of us.
