“Timing is everything”. I am sure you would have heard this phrase quite a number of times. However, here is an analysis that will make you rethink the importance you peg to timing in the stock market.
Meet our investors
For this analysis, we consider three starkly different investors:
- The God: God, as always, knows everything. That’s why he makes sure that invest every month at a time when the market is at the lowest, ensuring the highest monthly return. Anytime there is a big drop or crash, he manages to make an investment at this point. Oh boy! We would give up anything to become lucky like him 🙂
- The Most Unfortunate Guy: While this unlucky guy tries really hard to time the market, he ends up investing when the market is at the highest. Therefore, on monthly basis, this guy earns the lowest possible return.
- The Lazy Guy: Our lazy guy doesn’t bother about market timing. He just invests on 7th of every month. How boring!
Here are their surprising returns
|INR 5000 Invested Every Month for 18 years|
|The God||The Lazy Guy||The Most Unfortunate Guy|
|Investment Amount (INR Lakhs)||11.05||11.05||11.05|
There isn’t much difference investment value and the return of these three investors.
Surprisingly, it doesn’t matter whether you are the best market timer, worst market timer, or just a lazy guy, your returns will be similar if you just invest in a disciplined manner.
Why did this happen? Each month, the INR 5000 invested by each of the three, buys shares at the then-current prices. When the index is at low, the fixed amount buys a higher number of shares; when the index is at high, the fixed amount buys fewer shares. Overall, this strategy averages the fluctuation in returns because of market volatility.
The Big Takeaways
- Don’t try to time the market: One of the key learning from this analysis is that investors shouldn’t worry about investing at the top of the market or try to determine when to get in or out of the market. The result clearly showcase that the incremental return of timing the market isn’t that great, and, for most investors, it’s not possible 🙂
- Follow a disciplined approach: While you surely need an investment strategy for both asset mix and security selection to ensure consistent success as an investor, what’s important is to have the discipline to follow an investment strategy. The strategy of our boring guy – invest in a disciplined manner and stay invested for a long period – is easy to follow and effective for most investors.
- Remove the emotion out of investing: Sometimes, especially in a bull market, you will consider yourself god and start speculating – buying shares of unknown companies or investing in asset class without really understanding the risks involved. On the other hand, sometime, especially in a bear market, you will feel unlucky and sell shares at rock-bottom prices. In both cases, you will lose money. Don’t let your emotion and short-term market fluctuations determine your asset allocation or portfolio.
We analysed the last 18 years of BSE Sensex data to figure monthly minimum, maximum, and value on a random day of the month – 7th of every month for this analysis.
Assuming that INR 5000 is invested every month at a minimum value, a maximum value, and value on 7th of every month, we calculated the annual rate of return and terminal value of these investors – The God, The Most Unfortunate Guy, and The Boring Guy.