Equity investing: For best returns, stick to the long-term plan

It is difficult to time the market to your benefit. So stay committed for the long haul for meaningful gains. And SIPs in equity mutual funds are one way of doing so

That said, investing for the short term around market highs does heighten the risks with negative return going up to -56% in a one year period and 50% of the time returns falling below the 10% return threshold.
That said, investing for the short term around market highs does heighten the risks with negative return going up to -56% in a one year period and 50% of the time returns falling below the 10% return threshold.

By Piyush Gupta

After having hit their record highs in October, the equity markets have moved sideways in a small bout of volatility. Investors would be nervous of the market levels and the recent volatility. What if it is a bubble? What if there is a third wave? Should one exit while the going is good?

Our analysis shows that such questions become irrelevant when one is focused on the long term. Long-term investing negates the fear of market timing – both entry and exit – creating wealth over time. The analysis considers the following scenarios. (1) 52-week high: Investor invests at all the 52-week high values; (2) 52-week low: Investor invests at all the 52-week low values; (3) At any point of time: Investor invests in the market without looking at the market level. (S&P BSE Index values between July 30, 1979-November 11, 2021, used for analysis. The 52-week high and low values are calculated every day since 1979 and unique values are considered for investment analysis).

  • For the high and low scenarios, returns for 1 year and 3/5/7/10/15 years are computed and the averages, maximum and minimum returns analysed.
  • In case of investment at any point of time, all the periods are analysed to generate the average, maximum and minimum returns.

Short-term volatility remains across peaks and troughs
Most investors tend to believe investing at market highs provides sub-optimal or weak returns in the short-to-medium term (1 to 5 years) and superior performance when invested at market lows. Our analysis, however, shows that while the risk of weak returns reduces when invested at market lows, it is still not a fool-proof method and there have been instances of negative (up to -23% in a one year period)or suboptimal returns (10% of times returns have been below 10% returns) despite that. That said, investing for the short term around market highs does heighten the risks with negative return going up to -56% in a one year period and 50% of the time returns falling below the 10% return threshold.

Long-term investing limits risks of timing the market
The limitations that we saw in terms of probability of poor performance in the short term reduces considerably as the investment horizon increases. This holds not just for investors who invested at market lows but also those who have invested at market highs, or who have not considered market timing. The probability of sub-optimal returns also reduces considerably as the investment horizon increases.

Our analysis shows investors who invested across market phases, high, low or at any point of time, saw no negative return for a holding period of 15 years. Additionally, the probability of a greater-than 10% return also increases to 85% of the instances when invested at market highs and 94% in case invested at any point of time.

Ride the cycle
Market gyrations are quintessential to equities. It is also pretty difficult to time the market to your benefit. For instance, in the period analysed since 1979 — comprising around 11,000 instances when markets were open for investing — there were 905 unique instances when the markets were at 52-week lows and 1,104 unique instances when markets were at 52-week high. That’s a lot of analysis to identify the highs and lows, and make market investment moves.

Further, in a growing economy such as India, the probability of market lows tends to be lower than market highs, thus reducing the opportunities to time the market. Instead, it would be better if investors stick to their financial plan over the long term to derive the best returns from equity investing. Since no one knows the delta, one needs to stay committed for the long haul to make meaningful gains. And systematic investment plans, or SIPs, in equity mutual funds are one way of doing so.

The writer is director, Fund Research, CRISIL

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