Its All A Matter Of Time!

With the cases of corona virus increasing in India and around the world, people are gradually becoming sceptical of the future. During such times it is interesting to observe the behaviour of investors. For some investors the fear factor takes over and they take irrational decisions of exiting the market by selling their portfolios. Some others take this as an opportunity to invest as they believe that market corrections are a great opportunity to invest. They believe in their ability to predict when the market will bottom out and then try to time the market.

Speculators also try to predict what all can possibly go wrong and which of the companies will have poor quarterly results and which companies are likely to benefit because of the fear factor taking over in the market. In this article, we will try to study returns of investor who have been able to correctly time the market since 2008. To avoid any stock or sector bias, we have taken Nifty 50 index values to test the hypothesis. Market timing is a strategy of buying and selling stocks on the basis of prediction of market behaviour using fundamental, technical or behavioural studies.

Let’s understand this with an example. Assume an investor who was able to invest in Nifty 50 stocks at the time when the index was at the lowest point. Let’s call him the ‘smart investor’. To compute the returns that this smart investor could make, we obtain the monthly closing index values for the year 2008, specifically as on December 3, 2008, when the index value was at the lowest point for that year at 2,656. Since the smart investor has the ability to time the market, let us assume that he invests Rs. 1,000 at the lowest level. If he remained invested till date – March 3, 2020 – the investment returns that he could make works out to be a compound annual growth rate of nearly 13%.

As compared to our smart investor, there is another investor who believes in investing regularly every month as he does not have much faith in timing the market. Let’s call him the ‘SIP investor’. Since he cannot time the market, he is able to invest at the Nifty average index value for the year 2008, which is 4,203. If he remained invested till date – March 3, 2020 – he could make a return that works out to a compound annual growth rate of nearly 9%.

Staying invested for a long time is the key to building up wealth rather than indulging in knee-jerk actions and reactions, suggest Dr. Ruzbeh J. Bodhanwala and Dr. Shernaz Bodhanwala, faculty members of FLAME School of Business, FLAME University, Pune 

From the below table we can observe the yearly minimum and average of the monthly index values. The smart investor has abnormal abilities and he invests in the market every year at the lowest point. Now let’s analyse what will be the overall impact on wealth if the smart investor and SIP investor have regularly invested Rs, 1,000 every year since 2008 till 2020.

The smart investor is able to earn at a higher rate as compared to the SIP investor. His wealth is Rs. 26,082 as compared to SIP investor’s wealth of Rs. 21,229, as can be derived from Table 2. This would obviously happen as the smart investor is buying Nifty index at the lowest point. Now let’s consider some practical aspects. Is it logically possible to believe that someone can time the market so correctly every year?

This looks highly unlikely whereas the returns generated by the SIP investor would have a 100% chance of earning a return of 10%. The equity market generates higher return with very low risk only if an investor continues to stay invested over a long period of time and the benefit of averaging also works if there are no knee- jerk reactions in the way we invest in the stock market. We want to leave readers with the thought that time spent being invested in the market is more important than timing the market.