Guide To Investing In Stock Market (Part IV)

Market Timing Or Time In The Market

It is not timing the market, but, time in the market that matters. No one is perfect to time the market to perfection but if one spends sufficient time in market after investments then success is more or less assured. There is no record for investors who have a cent percent success ratio in timing the market, it can happen to anyone once or twice by sheer luck but there are billions of investors who have made wealth by being remaining invested in the market.

Remaining invested is most helpful when dealing with risk bearing investments such as equity or balanced mutual funds. One should always know the time horizon for equity investment i.e. when do they need the money back. As this time period increases, the risk of losing decreases! Generally an investment period of 5 years is recommended, in the least for equity investments. Suppose one invests when the markets are at a peak it is still possible to make good returns if the investor remains invested patiently. If you had invested at the peak of IT boom in the year 2000 you could have still made a 16.5% returns after 5 years i.e. year 2005. If you had continued to hold your investment till the end of 2006 you would have made 134% returns! The returns earned here refer to the returns earned from investing in Nifty and if you consider an actively managed equity fund the returns were 466%% in absolute terms. This is not a one off event; similar returns have been experienced at different time periods.

Study shows that in last 11 years the downside probability of Nifty was just 15% if one stayed invested for 5 years or more, irrespective of the time he entered the market. While the downside probability increases to 30% if the investor would have remained invested for three years or so. This to some extent proves that higher you stay invested in equity markets the probability of loss reduces to that much extent.

The idea, of being invested in a good well-diversified equity fund with a long track record of success, is that it would most likely outperform the index due to its ability to select the right equities instead of relying on a general trend. By choosing the right time horizon for your investments and then matching it with the right investment is crucial to making appropriate gains. If one does not want to take the risk of losing, then he should not venture to invest in equity for shorter periods. Instead he could look at bond funds or hybrids with low equity exposures. And of course, a systematic investment plan removes a good amount of uncertainty from the process.