Time in the market vs. Timing the market: Why long-term investing beats short-term trading?

On 31st July the stock markets closed at their 4 consecutive record high and on 1st August the BSE Sensex even made an intraday high of 82,082 crossing the 82,000 mark while the Nifty crossed the 25,000 mark. Every time the indices touch a new high, most retail investors jump up and ask a question: should I be cashing out my chips? The root cause of this behaviour stems from the fact that most investors have a trading mentality in an asset class which is long-term in nature.

In trading, timing is everything. Do equity traders end up making money? A recent SEBI study shows 99% of investors who traded in futures and options lost money. In investing, on the other hand, time in the market, rather than timing the market, is a better determinant of long-term returns.

Take the BSE Sensex itself as an example. In the last 12 months, this proxy of the market has hit 5 successive highs. If an investor had sold all their holdings on 17th July 2023 when the Sensex touched a historic high of 66,589, then by 31st July 2024 they would have lost out on an up move of another 22.75%.

BSE Sensex historic highs of last 12 months

Source: Bloomberg; past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments.

Investing offers multiple advantages over-trading. In Investing, you don’t put all your eggs in one basket. For instance, you would look to invest the core of your portfolio in a stable, well-performing equity fund, with a long track record. Large-cap funds are safer options for investors because just like a big ship can weather a storm better than a dinghy, due to its better ability to withstand larger waves. A large-cap fund is like a whale in the ocean, it does get disturbed by a storm but is rarely capsized or beached by it.

Unlike trading where you go and bet all of your corpus on one or multiple trades in a day; in Investing, you follow a disciplined process where you put away a defined amount every month regularly, to benefit from rupee cost averaging both while investing via a SIP or withdrawing via a SWP.

Let’s take an example. You could have made 22-23 % by investing in a passive BSE Sensex index fund over the past year, in contrast actively managed large cap funds that invest in top 100 companies by market capitalization offered an average return of 40% in the last one year. (Source: Bloomberg; past performance may or may not be sustained in future).

These top or very large companies, mostly leaders in their respective fields, fare better when the market gets into uncertain or volatile phases.

Many investors, especially new and inexperienced ones, chase returns and get into investment options without understanding the risks. This is something one should avoid in the current market scenario. Stick to large cap funds if you are looking for a measured equity upside.

Steady investing almost always does well

Let’s look at how time in the market vs timing the market played out with an example. Suppose you had invested ₹1 lakh in the new fund offer of a large fund some 20 years ago this would have grown to ₹21 lakh. However, if instead of this lumpsum investment, if you signed up for investing ₹10,000 every month via SIP in the same scheme since inception, today instead of being a lakhpati, you would have been a crorepati because your corpus would be worth ₹1.28 crore.

Common sense warrants one to tread carefully when four bumper years happen in the market over five years. It is almost impossible to predict the market movements, especially over a short-term period.

In such a scenario, what is the ideal strategy to navigate the market? Instead of concerning themselves with trying to time the market, investors should try to focus on their goals or investment objectives. You will be able to stay invested and build wealth irrespective of the market conditions only if you stay focused on your goals by cutting out all noise and chatter in the market.

Sanjay Chawla, CIO Equity, Baroda BNP Paribas MF