Focus on Time and not Timing

There is only one way you can make money in the equity market, which is to buy low and sell high. However, that is easier said than done. This is because of the behavioural bias that most investors suffer from. Their overconfidence leads them to overestimate their ability to time the market, which is if not impossible, definitely difficult. This is accentuated by the advent of the internet and social media that has made vast amount of financial data and expert views available to investors at their fingertips. This has resulted in an unintended consequence of investors’ overconfidence and substantial loss of wealth for investors who attempt to time the market.

What is currently happening with mutual fund investors on an average is that they are trying to time the market. This is reflected in the net flows to the equity-dedicated funds. November 2020 became the fifth consecutive month when equity-dedicated funds saw net outflow. In this month, all the sub-categories of equity-dedicated funds saw net outflow. Since the market is at its lifetime high, investors are booking profit and trying to time the market. History shows that mistimed decisions of investors have led to huge loss of returns. Even in the current situation, someone who had exited from his investment in the month of August or September might have lost 20 per cent of 30 per cent of the gain depending upon the category he had invested in and redeemed.

Our cover story of this issue does a historical analysis of returns generated by your investment after the equity market has hit an all-time high. It shows that there is marginal difference in returns in the next year. However, beyond that there is hardly any statistical difference in returns. Therefore, my suggestion and recommendation for New Year is to stop timing the market and if you want to reap maximum out of your investment, give your investment the required time to grow. We wish you and your family a Happy and Prosperous New Year 2021.

SHASHIKANT