The Hindu Business Line : Just a matter of time

"Is it a good time to invest now?" A question very few equity market investors would not have asked. Most investors seeking to dip their toes in the stock market think they should `time' the market.

But what is market timing? Quite simply, it is trying to identify the best time to enter and exit stocks. Why time the market? Primarily because most of us believe that investing in stocks can only yield good results if only you get in and get out at the "right time."

The risk factor

No doubt, a number of professionals are able to successfully use this strategy to reap benefits. However, there is no surefire way of predicting the market. So, one of the biggest risks of attempting to time an entry is that you could miss the market's best performing phases if your efforts to investment go out of kilter. In other words, investors moving their funds to cash or other conservative investments believing that the market would go down may find that the period turned out to be the best of times for stocks (and, ironically, worst of times for the investor). Or he/she may miss re-entering on an upturn.

So does just holding on, help? Not necessarily, if you had resisted the urge to sell but still thought like a market timer. For instance, stopping systematic monthly investment plans and waiting for the market to become more attractive before investing afresh could impact your wealth over the long term, even if you had held on to your existing investments.

While the success of timing the market versus a buy-and-hold strategy can be an endless debate, forecasting market movements requires expertise of the kind that portfolio managers exercise (sometimes unsuccessfully!). Individual investors who cannot afford to spend the kind of time and energy in implementing such strategies would do well to leave market timing to the experts and, rather focus on their personal financial goals.

Diversification, the key

But market fluctuations can make even a plucky investor nervous. What is the best defence? The answer may lie in a well-diversified portfolio (of equity, debt, cash and other asset classes) and a disciplined approach to investing at regular intervals. This has to be done keeping in mind one's risk tolerance, time horizon of goals and the cash flow requirements. Don't let short-term volatility drive your long-term investment planning. This does not, however, mean that you just hold on to all your investments until you reach your goals. Regular monitoring and tweaking are necessary to tune your portfolio to suit your changing investment needs. You need not wait for an impending market movement to do this. It has to be done regardless of whether the market is at its highs or lows.

The compounding tool

As a young investor, time is by far your best ally, not timing. Remember, time gives you a far surer weapon — compounding or making money on money. Compounding helps lower your risk of losing money over time, simply because it gives a better cushion to absorb the risks. Further, the time-factor allows your portfolio a chance to ride out the ups and downs of the market and yield reasonable returns at lower risk.

Don't try too hard to second-guess the financial markets. You may miss out on the other happy moments in life. They too require your time, not the markets.

Please send suggestions and queries to younginvestor@thehindu.co.in, or The Research Bureau, The Hindu Business Line, 859-860, Anna Salai, Chennai-600002.