We have all heard about the golden rule of investing: buy low, sell high.
Just follow this simple rule and you will increase your fortune.
In other words, master the act of timing the market: identify the best time to get in (buying a stock/ investing in a mutual fund when the price is low) and you will generate lot of profits.
This sounds very easy and simple in theory. But in reality it is anything but. Because the only certainty about the stock market is its volatility. We all know that it will go up and it will come down. But no one knows when and why this will happen.
There is no fixed formula to correctly time the market. The truth is no one has any idea what the market movement will be tomorrow. It might go up. It might go down. It might stay the same. One can’t predict the future no matter how much research one does for that.
This fact doesn’t place much confidence in the concept of market timing does it? But many investors keep trying to time the market, thinking that they can stay ahead of it and make more money.
“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions doing it.”
– Peter Lynch
In fact timing the market is usually a recipe for losing money. This is because to ace market timing strategy you have to ace its 3 components as well:
- Getting in at the right time,
- getting out at the right time,
- & knowing what to do in the interim.
Let’s understand this with help of an example:
Say that the stock market has been rising for a few years. And you, using some calculation or indicators or believing a rumour, decide that it has reached its peak and is going to dive down. So you sell most of your holdings. But what if the market doesn’t tank and keeps on increasing for another year or so? You would lose out on some of the best performing months of the market.
Even if you get lucky and exit at the peak, you’ll have to figure out where to park the money until you decide to enter the market again. Will you place your money in conservative instruments and suffer through low interest rates or will you select some other higher risk instruments which may or may not work and possibly reduce your gains?
Then the biggest challenge: when will you enter back into the market? How do you know how much correction will there be? Will you get back when the market falls down 5%? Or 10%? Or 20%? Stocks could keep falling even after you buy back in. Or you could wait too long waiting for that perfect time and miss the upswing of the market.
It is not possible to predict when the market has hit its lowest. It’s even harder to predict when it will begin to go up.
More money is actually lost in preparation or anticipation of market correction than in the actual correction of market itself.
There may be some who find success by timing the market, just as some find success by winning the lottery. The question is why waste time, effort, resources and money on timing the market when the odds are so heavily against you?
You can’t control timing the market. But you have control over time. Therefore time in the market is a better option than timing the market.
You are likely to have more success in the market if you decide to stay in for a long period of time. By long I mean years, not months. This is known as HOLDING or Buy & Hold. In the long run your holdings WILL survive through all the cycles of market and you will enjoy good rate of returns for your patience along with the power of compounding which is the only confirmed way of wealth creation.
And if you choose to invest via SIP mode you can turn market volatility into a long term wealth creation opportunity.
Also, markets rise over time. All the noise and fluctuations are for short term. In the long run stock market most definitely gives good positive returns. So, let time be your friend and for wealth creation spend time in the market and not on timing the market.
Just remember that time in market doesn’t mean ignoring your investment. It’s always good to review your portfolio regularly (annually is fine) to make sure that it is still in line with your goals and objectives.