The Hindu Business Line : Why timing may make you miss the bus

We are currently in a market environment that has been variously described as “unprecedented and “extreme”. There has been sufficient volatility in the market to make even a seasoned investor pause.

Equity markets re-visiting three-year lows and most asset classes declining in tandem has unnerved investors. At a time like this, when markets go down sharply, it is normal to be concerned and think of moving out of the market to avoid further loss i n the value of your investments. But hasty and emotional decisions can jeopardise your important financial goals.

It is important to remind ourselves of the long-term financial goals we are investing towards. Whether saving for a home or children’s education or retirement, our reasons for investing remain intact in the face of a changing market environment.

Of course, it is good investing sense that we must re-balance our portfolios in volatile markets. Equally, even in turbulent financial times, it is important to look beyond short-term movements and to consider equity investments from a longer-term perspective.

What’s the purpose?

The anxiety of losing assets through poor stock market performance can lead to investors redeeming their investments from equity funds as they seek to miss the worst periods of trading. So, what is the purpose of investors pulling capital from equity funds in times of crisis: surely, so that they can invest when the market outlook is more positive?

But if you are thinking of moving your investments out of the market at times like these, when markets are falling, and then moving in again when markets start to move up, you may be taking a bigger risk than staying invested.

It is impossible to predict the day-to-day movement in the stock market and missing just a few days of good performance can significantly reduce your overall return. More often than not, the worst days in the stock market are followed by best days in quick succession and staying out of the market in those days could prove costly.

Ten best days

Indian stock market data were analysed for ten years from October 1998 to October 2008. Based on the daily returns of the Sensex, we identified the best 10, 20, 30 and 40 days over the decade. We then assumed a notional investment of Rs 1 lakh to calculate the impact on returns if an investor missed the ten best days or 20 best days, and so on.

For example, if you had a notional investment of Rs 1 lakh in the BSE Sensex and you remained fully invested over the ten-year period from 1998-2008, the value of your investment would have been Rs 3,48,021.

However, if you missed the 10 best days, your investment value would be Rs 1,71,290. A loss of Rs 1,76,731!

Not surprisingly, the more the number of “best days” that you miss out on, the more dramatic the fall in your returns. Miss out on the 40 best days and the value of your investment would be Rs 41,985.

That’s Rs 3,06,036 less than you would have got if you had remained fully invested.

So how do you ensure that you don’t miss out on the market’s best days? It is hard and that is why Fidelity advocates not trying to time the market.

For example, on October 13, 2008, the BSE Sensex jumped by 781 points – one of the biggest one-day rises it had recorded until then. In the middle of an extremely turbulent month in the markets, this was probably unanticipated. What it shows is that when investors leave the market in order to miss the bad days, they are likely to miss the good days too, counteracting the very essence of what they are trying to achieve.

Investors who make short-term investment decisions based on poor market performance will lose out, even if they put capital back into the markets shortly afterwards.

Removing money when your assets have already been reduced, as a result of falling markets, realises your capital losses. If an investor then reinvests in the markets when the outlook is more positive, he is investing a reduced amount, and therefore requires a higher market return to reach the value of investment he would have achieved had he stayed fully invested.

That’s why at Fidelity, we say, that it is time in the market and not timing the market that makes the difference.

(The author is Managing Director and Country Head – India Fidelity International.)

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