Home / Money / Personal Finance /  Trying to time the markets is not advisable
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Every webinar, cocktail party or conversation I have with someone, I get asked the same question: Has the market run its course? Will it correct now? While I understand investors’ fear of a market correction, I don’t agree with that viewpoint. Anyone who has lived through a few market cycles knows that corrections are an unavoidable element in building wealth. To get the most out of your investments, you must fully embrace the market ups and downs. Attempting to participate in one while avoiding the other will just disrupt the compounding magic.

“How much return will I earn from my investment?" is the most frequently asked question. Well, no one really knows the correct answer because there are so many variables and elements that go into the end result. Instead, investors should ask themselves, “How much time can I devote to my investment?"

We are adamant that market timing does not work and advise against it. In truth, less than 1% of investors have benefited from it. The rest have profited from their long-term investments. It’s simply not credible to believe that a bell will ring to notify when it’s time to enter or exit the stock market.

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Despite all evidence to the contrary, people continue to waste time and effort attempting to time the market. The cause for this is ‘overconfidence bias’, a well-known notion in behavioural finance. In a bull market like the current one, people have a propensity to overestimate their abilities and skills as investors. This bias deludes the mind into believing that it is possible to continually add value to portfolio returns, avoid downturns and then reinvest wisely during the upcycle.

The Nifty has experienced double-digit corrections in 18 of the past 20 years, with nine of these corrections being 20% or more. It appears to be a dangerous situation. There is, however, another side to the coin. The Nifty has risen from 1,000 in January 2001 to 17,000 in August 2021 throughout the same time span. Over the past 20 years, that’s a 17x return or a compounded return of 15%, easily outperforming all other asset classes, especially on a post-tax basis. Would the outcome be much better or worse if someone had timed the market through these 20 years? I would leave this question open for those who are looking to make decisions for the next 20 years. At Motilal Oswal , we have time travelled this journey of 20 years by backing quality businesses run by quality managements that offer a runway for strong cash flow growth and buy them at a reasonable price.

A clear investment philosophy and an armoury of investment frameworks can add value to the portfolio returns, while market timing can detract a lot of value.

Another ‘bias’ that can influence investor behaviour is the belief that ‘high return days’ only occur during bull market periods. More than half of the top 30 days in terms of returns occurred during a bear market, according to a 30-year study of “best days" in terms of returns. Market timers continue to overlook the unpleasant reality that 60% of the best return days occur during the bad market that they are attempting to avoid.

In the bull market from January 2002 to January 2008, the Nifty 50 moved up by nearly six times from 1,100 in January 2002 to 6,300 in January 2008. This implies a compounded return of 33% per annum. However, during this short period of six years, the Nifty went through seven double-digit falls. Two of those falls were as deep as 30%.

There is a reason why compounding magic is known as the eighth wonder of the world. The Sensex has multiplied 460 times, or a cumulative return of 16%, since its inception in March 1979. During this time, gold has multiplied 68 times (a 10% compounded return) and bank savings have multiplied 36 times (compounded return of 9%). The future of stocks looks fascinating. If only we had the patience to wait for the future to emerge.

Navin Agarwal is MD & CEO, Motilal Oswal AMC Ltd.

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