Investment Tip: ‘It’s never a good idea to time the market’

By: |
Updated: July 10, 2015 1:38:07 PM

Growing number of new demat accounts, surge in assets under management in equity schemes of mutual funds and increasing sales of unit-linked insurance policies...

Stocks investmentStock market investment: Timing entry and exit is just a matter of luck and is not a prudent investment behaviour

Growing number of new demat accounts, surge in assets under management in equity schemes of mutual funds and increasing sales of unit-linked insurance policies clearly indicate that investment in stocks is gaining traction.

However, investors must keep in mind that whenever markets reflect optimism, most people invest in stocks and when the markets are sideways or are reflecting pessimism, most want to time the market. This goes against the basic rule of stock market investment. Timing entry and exit is just a matter of luck and is not a prudent investment behaviour. Typically, investors put in money in asset classes based on returns expectations, peer recommendation and ease of investment.

When a new equity investor looks at the annualised return from January 2008 to March this year, the numbers are not encouraging. In fact, seven-year rolling annualised returns of the Sensex is 8.65%. On the other hand, a 10-year rolling annualised returns of the Sensex is above 15%. So, an investment of Rs 1 lakh, giving a return of 8.65%, will generate Rs 1.79 lakh in seven years. If the market clocks 15.75% returns, then the corpus will be Rs 2.78 lakh. These illustrations are specifically for the Sensex and and when the comparison is carried out on specific stocks or mutual fund schemes, the results will vary.

Equity should be considered as an asset class generating wealth over multiple time periods. An investor must consider the time-frame for the investment and act accordingly. There will always be ups and downs in the market and a proper capital allocation would reduce chances of error. In equity, be it mutual funds or direct equity, an investment horizon of 3-5 years should be ideal. Volatility should not be confused with risk and one must be prepared for higher volatility due to domestic and global factors. Always determine your risk appetite and invest accordingly.

There are instances of companies like Wipro and Hero Motors who have generated more than 100 times over a 20-year-plus period. While this looks good and we all want to be a part of the story, but the moot point is, will you be able to hold on to multiple periods of inactivity (as in transactions of buy/sell). Will you not get the urge to sell when the markets go higher and or when the markets slip. Inactivity should not be confused with zero action. Monitor the holdings and if the company’s prospects or governance is not in good stead, then you should revisit the holdings.
One must consider equity as an asset class, with minimum holding periods in excess of 5 years and above and should not confuse action as in trading equivalent to investing. Always understand the difference between risk and volatility and long-term equity holdings will bring cheer and joy in your journey to create wealth.

* Timing entry and exit of stock market investment is just a matter of luck and is not a prudent investment behaviour
* There will always be ups and downs in the market and a proper capital allocation would reduce chances of error
* In equity, be it mutual funds or direct equity, an investment horizon of 3-5 years should be ideal
* Volatility should not be confused with risk and one must be prepared for higher volatility. Determine the risk appetite and invest accordingly

The writer is founder and managing partner of BellWether Advisors LLP

For Updates Check Personal Finance news; follow us on Facebook and Twitter

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.