“I understand the markets so well that I know exactly when and what to buy and sell” said no man ever! Let alone professional money managers, even the biggest investment gurus have never made such a claim. What they rely on, is their experience, solid research, and constant reviews of their investments that culminate into stellar strategies in the long run.
However, when a first time investor starts out investing in stocks, a few fluke successes later, he ends up thinking that he has mastered the art of timing the markets and ends up burning his fingers more often than not. The biggest problem is being right twice, not just about selling stocks at market highs but also about buying at the bottom.
“Timing” the markets encompasses not just the art of determining when to exit 100% from an asset class, but having the forecasting skills that helps one to determine how to buy a stock at the bottom and selling it at a peak. Needlessly to say this is a superior skill that even the top market players do not claim to have mastered.
However, what most investors understand about timing the market is tilting one’s portfolio quite often and increase or decrease exposure to certain stocks in order to make the most of market opportunities. But this can be a potentially disastrous action as it may erode the value of his stock portfolio as more usually than not he does not have the required expertise to make such calls on a regular basis and moreover it’s impossible to time the markets..
What professional managers do on the other hand is strategic allocation or rather distribution of the corpus they manage by syncing it to the market trends to maximise gains for their investors. While professionals may be using market timing as wealth creation strategy, an individual investor trying to do the same by investing in equities may potentially miss out on the best performing cycles in the market. At a time when market volatility is at a peak, attempts to time the market not only hurt the value of his stock portfolio; investors can incur additional expenses such as trading fees and taxes.
Financial prudence lies in wealth creation, and to create wealth, time is the key ingredient. An investor should focus on detailed and thorough research of the companies that have exceptional growth opportunities and hold them till there is no change in the fundamentals of the company. This he should do after carefully assessing his risk tolerance and chalking out his long term goals before investing in equity markets.
While striving towards the achievement of their long term goals what works best is the purchase of shares after in-depth research and analysis and holding them through market cycles with patience. In investment parlance it is called the “buy and hold” strategy that essentially involves spending time in the market and taking advantage of the power of compounding. Holding stocks patiently over time helps the businesses that one has invested in attain maturity and yield better returns in later years. That indeed is the power of compounding.
It’s not just better returns; the power of compounding can also help an investor manage risks over time. As is visible from the illustration below, while rolling returns from the benchmark BSE Sensex increase steadily for as long as the investor remains invested, the probability of negative returns not only comes down as time progresses, it comes down to nil after 5 years.
Besides, the buy and hold strategy does not mean ignoring the long term investments once made. As investing goals change, it is prudent to give one’s stock portfolio periodic check- ups to ensure that the investments are on track towards the meeting of one’s goals. For instance, investments in mid-sized high growth companies should be reserved for goals that are more than five or more years away. Similarly those nearing retirement may want to trim down equity exposure to the minimum and invest in safer avenues.
Some investment experts say that for those interested in “timing” may do so by segregating a “play bucket” from one’s long term investments. We however, do not subscribe to this view and strongly believe that timing the markets to make a “quick bucks” cannot be compared to making a sound investment. As an investor, if you have carried out adequate research and are investing in a fundamentally strong company, a 10% upside or downside should not matter to you and you should not be swayed by “market sentiment”. By sticking to this principle and focusing on your long term goals there is no stopping you from creating wealth over time.