Why Investors Shouldn’t Time The Market

I saw this study that you did, may be about a month ago. In that, the few inferences and the few data points that you are showing show that agar maine teh kar liya hai ki maine invest karna hai, then when do I invest doesn’t matter, why so?

Manuj Jain: Right now, a lot of new investors are coming into mutual funds. I mean, they like the mutual fund product and day by day, we see the SIP book is touching the sky. Many a times, people ask us that should I start my SIP right away or should I wait for may be a couple of months, may be a couple of quarters, because many people believe that markets are on the higher side. And they want to start investing at the bottom.

So, we did an interesting study. We took some 27 years of data of Sensex TRI (total return index). And, 27 years is a large enough sample size and we have taken all those periods when Sensex has corrected more than 20% from the peak. Obviously, let us accept this fact that only in hindsight we will know what is the market cycle’s peak and what is the bottom. But, let us assume that one can time the market and you can precisely predict what is going to be the date for the market to bottom out. So, we did this analysis and came up with this analysis of nine such market cycles when market is nothing more than 20%.

Let me give you one example. So, like all of us know that during global financial crisis between 2008-2009, the markets had corrected more than 60% from the peak. So, somebody would have started an SIP in January 2008, which in the hindsight we know was the peak of that market cycle, while somebody would have started SIP at the bottom of the market cycle which is March 2009. So, if you have analysed this data point, if somebody would have started at January 2008 at the top and continued investing via the SIP till now—till let us say September 2023—the approximate return he would have got is about 13%. And during this period, whatever money he has invested, that would have grown by 13.2% versus somebody who would have started right at the bottom. He would have made 13.3% ex-IRR (internal rate of return). So, the data of differential is 0.1.

The second guy has delayed investing by 14 months. Let us say he has invested Rs 10,000 per month. So, he has invested Rs 1,40,000 less as compared to somebody who had started immediately without waiting for the bottom. So, because the second guy has invested Rs 1,40,000 less by delaying investment for 14 months, the Rs 1,40,000, in 14 instalments, is not getting the compounding benefit. So, while the returns look almost similar, the guy who started immediately—in January 2008—has made more wealth as compared to somebody who has waited for the bottom. And even if he would have precisely timed the market, he ended up making less money as compared to somebody who started at the top.

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