Investors should not fall into the trap of timing the market, i.e., invest when they think the markets are at their lows or sell when they think the markets have 'peaked'.
The oft-repeated advice is a generic adaptation of the theoretical view that markets are random walks and therefore inherently unpredictable in their outcomes. Investing at the 'rock bottom' may sound like a smart investment, but in reality, the 'bottom' is never achieved. It's the same with selling at the peak.
The most recent example is the current rally in the global markets (including India) wherein stock prices have moved up sharply. While expert financial analysts would present umpteen reasons for this turnaround, just how many of them had foreseen this uptrend and invested in the early days of March when markets were struggling at their lows?
On the other hand, if one had displayed prudence and invested say on October 10, 2008 (in the BSE Sensex) when the Sensex had fallen below 11000 mark and had stayed invested, one would have gained 11% in terms of annualised returns on his/ her investment as of April 23, 2009.
One could, of course, ask how many of us would have risked investing amidst all that gloom?
The point is most valid and, in fact, reinforces my earlier argument that timing the markets is an exercise in futility. If an investor has a firm conviction, acting in a determined, process-oriented manner is sure to make reasonable returns.
For example, if instead of investing a lump sum in the BSE Sensex in October 2008, you had invested a sixth of the amount on the 24th day of every month (starting from October 24, 2008, as of April 23, 2009, one would have had 12.3% annualised returns.
To reiterate, what is important is the conviction, and acting on the conviction, not fashions and fads like waiting for an opportune time to buy or sell.
Simple as this may seem, not many investors follow this approach. And why?
Ultimately, it is all about trying to inculcate a sense of discipline in our financial life and ensuring that we stick to this approach, no matter how the external environment is. If you think this is a newly invented panacea for financial investing, you are wrong. This is a time tested concept that most of us know as systematic investment plan (SIP). While we may have heard of and become convinced of its success over time, how many of us have started to invest through SIPs?
The recent rally might just compel all the fence sitters to think seriously of starting SIPs. You could start off small, and check out the philosophy for yourself before committing serious amounts.
The writer is chief executive officer, Mirae Asset Mutual Fund