Warren Buffet is one the richest living person on our planet, and also one of the sharpest investor. Having made his fortune as an investor in equities and other financial instruments, there cannot be a greater guru than him on investing. But even the great master does not believe in the strategy of timing the markets.
"People that think they can predict the short-term movement of the stock market — or listen to other people who talk about (timing the market) — they are making a big mistake," says Buffett. Now if the 87 year old billionaire believes that timing is bad, it surely must be.
The honest fact is that when investors try to time the market, there are high chances of them losing their hard earned money in the process. A key to successful investing is resisting the impulse to time the market, and instead to hold on for the long term. Our trouble with market timing is due to human nature. We can be irrational and prone to panic and overconfidence. So while we may well have a long-term investment strategy, it can be hard to stick to it. We’re inevitably affected by unexpected events and emotions – fear resulting from a market slump, say – and lose sight of the bigger picture. Investors should resist the temptation to flee the market after turbulence and stick with a buy-and-hold approach to avoid missing out on long-term gains.
Investors often ponder on the prospects of timing the market especially when the markets are volatile. With the aim of maximizing the profits and beating the indices, people will sit over funds in their accounts waiting for an opportune moment to buy. The core trouble with that approach is what that opportune time is. Should the investor enter at 10% fall, or 20%, or just 5% correction? Should the entry be staggered at different key points? And more importantly, how frequent are such corrections in the market to justify the wait?
Over the past 15 years, there have been just a handful of times when the market has corrected by big margins. How does one predict them? Also, while these corrections did have a short-term impact on the indices, the long-term nature of equity as an asset class is still much relevant. An investor has to have a plan in place and more importantly needs to stick with them irrespective of the market scenario. There'll be times when the markets will boom and dip, when bulls will be on the run or bears will be amok, but it is critical that an investor must take a long-term view.
Numerous studies have shown that a regular investor makes more money than one who times the market. And the best way to take such investment is through the SIP or Systematic Investment Plan. Investing in equities through mutual fund SIP is a time-tested way to build a good corpus. Considering that most of the mutual funds are managed by experienced fund managers, one does not have to bother too much about what choices to make and where to invest.
Over a period of time, returns from a SIP in mutual funds will comfortably exceed inflation. In fact, a SIP-based approach can be considered as a good way to beat volatility as SIP is usually low-risk when evaluated over a long period of time.
Thus, instead of timing the market, it is better to SIP-it. And those who are much keen on the timing part, well there is also an alternative strategy, how about timing with SIP. Namely, an investor could run a normal SIP all through, and at points where there are major corrections, increase the SIP amount. This will surely help in creating a bigger corpus.
In the end, remember that building wealth is a long-term commitment, and to do so, it is better to stick to SIP rather than trying to time out the markets.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This idea has been conceptualised by Reliance Mutual Fund as an Investor Education Initiative.