Timing the market in a bull run

For several months now, market analysts and experts have said that Indian equity markets are expensively valued or are in an overbought zone, with the advice that investors should now be cautious and selective while making fresh investments.
 

Several factors - including the persistently high interest rates, the ongoing geopolitical tensions, alongside a slowdown in consumption in the domestic space were expected to keep a lid on gains in the equity market. Especially considering that the Nifty 50 has given positive returns on a yearly basis for several years now.
 

And yet, the recent performance in equities seems to have defied this caution and rationale.
 

Defying the predictions

Equity markets have continued to steadily gain and remain close to their all-time highs, with most sectors participating in this rally. And while it is good news for those who have already invested, those waiting on the sidelines to enter the market have continued to remain on the sidelines.

Which brings us to the discussion - can or should investors try to time the market?
 

Importance of Time in the Market

Out of  the several guidelines that one comes across when in their investment journey, one of them is that ‘time spent in the market is more important than timing the market’. Let us understand this better.

If we were to broadly divide asset classes into four broad categories, they would be real estate, equities, fixed income and precious metals or gold. Each of these asset classes has its unique characteristics which may make it suitable for a certain set of investors while making it ineffective or irrelevant for others.

Given that equities tend to be the most volatile among these asset classes, those who are risk-averse generally try to stay away from it, instead preferring to park their investments in an asset class which can give assured returns.

Investors who have a relatively higher risk appetite, a longer time horizon for investments or a deep understanding of the functioning of equity markets, meanwhile, also consider equities for their investment purposes.  

Tactical investing

Not everyone investing in equity markets, though, may be fulfilling these criteria. Several players also try their hand in investing in equities for short-term gains based on their assessment of news or tip-based trading. Several investors, though well-informed, also participate in short-term trades, a strategy known as tactical investing.

   
Which brings us back to the question - should investors try and time markets? Very simply put, no.

The fundamental principle for investing in the equity markets is betting on the earnings growth of a company - which if chosen well - is likely to see a strong growth over the years, and result in a significant appreciation in their share prices.
 

Several well-established companies continue to see a consistent growth in their earnings and consequently, share prices even years after of them starting operations and being listed, while some others see spurts of growth and a downcycle based on economic conditions and other factors.
 

The Power of Compounding

Given that compounding plays a key role in investments across most asset classes, and especially equities, it is absolutely critical that investments are given enough time to mature and make strong returns.

Instead of waiting for an opportune time or adequate funds to start investing in equities, investors should focus on making investing a habit, a discipline to which they adhere to. Regular investments, irrespective of market levels, tend to give much better returns than investments made sporadically, with an intent to time markets.

The best example for this would be SIPs, or systematic investment plans. While SIPs have been made popular by the mutual fund industry, the underlying principle of a SIP is that investors must make investments at regular intervals without being worried about market conditions, and this model can be replicated for direct investments in equities as well.

How does this help? In averaging, and maintaining a disciplined approach to investments.
 

Goal-Based Investing

When investors focus on spending time in the market instead of timing the market, most of their investments get the chance to be a part of several short- and long-term company specific and economic cycles, which can help even out performance in the long run.
 

Because the movement in share prices is not linear in nature, there could be phases of continued underperformance in the shares of a particular company only for it to make aggressive gains in some year. So much so that these gains could also outpace the gains made by another company which can given steady returns for several years. 
 

When one is invested for a relatively long time, it helps them be a part of all these years - both good and bad - which can eventually lead to steady returns on an average for that period.  
This is also important because one cannot always time the markets. Even if investors manage to get their timing of investing right, they may not be able to time selling these investments, which will again result in less than optimum returns. Any investor, almost never, can time the market right.
 

Instead, goal-based investing, and ensuring that one is putting aside a certain amount or percentage of their income at a fixed time interval works better. It can also save investors the hassle of monitoring equity markets.

Conclusion

Research shows that even missing half of the best days of the market over a prolonged period (either to invest or redeem) can significantly impact returns, especially when one takes into account the impact of compounding. 

To avoid these, it is prudent to remain timely with investments, rather than timing investments.