Timing the markets is futile. But SIPs mitigate that problem

Timing Matters

We calculated the extraordinary days when return was greater than 4 percent, greater than 5 percent and greater than 6 percent separately to see how many times these instances had occurred.

The total number of days were 5,950

Instances when return was greater than -

* 4 percent : 43 days (Probability : 0.72 percent)

* 5 percent : 27 days (Probability : 0.45 percent)

* 6 percent : 12 days (Probability : 0.20 percent)

What if you were not invested during these days?

This is how the equity curve would look like:

Basically, if you missed 43 days out of the total 5950 days your investment would give a 1.15x return.

But if you invested and did NOTHING then it would give a 12.7x return.

The chance that you will be able to catch those outlier positive returns is very low as their frequency of occurrence itself is low ~ 0.72 percent in 23 years.

When should I start investing? This another commonly asked question

Starting point of investments does matter. However, predicting the market in the short term is a futile exercise.

If you started investing and experienced a market crash in the initial few years of investing then there is a big difference in the total returns generated.

The 2008 Crash And Two Scenarios

Let’s look at two scenarios of Rs 1 lakh invested in Nifty 50.

Scenario 1: September 2007 to September 2022 (15 years)

- Initial Investment: Rs1 lakh

- Final Value: Rs 3.4 lakh

Rs 1 lakh invested increased to ₹3.4 lakh in 15 years.

Scenario 2: Dec 2008 to Dec 2023 (15 years)

- Initial Investment: Rs 1 lakh

- Final Value: Rs 7 lakh

Rs1 lakh invested increased to Rs 7 lakh in 15 years

How much difference did timing make? 3.4 times vs 7 times

The difference is significant because of the 2008 financial crisis that was experienced by investor in Scenario 1

What could an investor do to mitigate this risk?

Systematic Investment Plan

Lets add an SIP of Rs 1,000 per month to Scenario 1

Scenario 1 modified : September 2007 to September 2022 (15 years)

Initial Investment: Rs 1 lakh

Monthly SIP: Rs 1,000

Final Value: Rs 7.7 lakh

Rs 1 lakh invested increased to Rs 7.7 lakh in 15 years

Just by adding an SIP you can reduce the market timing risk significantly.

Timing the market is a futile exercise.

Investing with an SIP is simple and effective.

Time in the markets > Timing the markets 

Rohan Borawake is Co-Founder & CEO, Sabir Jana is Co-Founder and Head of Quantitative Research, at FinSharpe Investment Advisors. Views are personal, and do not represent the stand of this publication.