Timing the market vs time in the market: Which is better?

The mingy returns have, in fact, disappointed new investors who are now sceptical of investing in equities. A 27-month high SIP stoppage ratio in February 2023 is an indicator that investors have started losing patience amid subpar returns from equities in the past two years.

Amid all this, it is natural for investors to believe that they would be better off staying away from equities. But this argument has a flaw – we are looking at hindsight and trying to predict the future.

So, one mistake that an investor can commit at this point is to wait for the market to stabilize and invest only once it corrects more.

A financial nomenclature for the above school of thought is called timing the market. And investors should try to avoid engaging in such a strategy as the loss arising from it outweighs its benefits.

How timing the market can reduce your returns
While timing the market, it is likely that you will miss some days when the market rises. And although it may sound normal, missing the best days can significantly impact your corpus.

For example, if you invested Rs 1 lakh in a Nifty50 index fund in April 2003 and stayed invested till 31 March 2023 (20 years), you would have created a corpus of nearly Rs 23 lakh.But if you decided to time the market, which resulted in you missing some of the best days of the index, then that would have significantly reduced your corpus.

For instance, if you missed just 20 best days during this period of 20 years (4941 days), then that would have reduced your corpus to Rs 11.4 Lakh.

That’s half of what you would have accumulated, had you stayed invested irrespective of ups and downs.

The chart below shows how your corpus would have been affected when you missed some of the best days of the index.

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Clearly, spending time in the market can help you accumulate a bigger corpus as opposed to trying to time the market. Let’s contrast this with the simple strategy of spending your time in the market.

How increasing your time horizon can improve your returns
If you can give your investments more time to grow, then that can improve your return significantly. To illustrate this we can look at the table below, which shows how the chances of earning good returns go up when you give time to your investments.

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As the table shows, the chances of losing money and earning good returns increase with time. For example, if someone invested for a year, the chance of losing money is around 17%.

But as the investment horizon increases to more than 5 years, the occurrences of losing money have reduced to zero. Moreover, a longer investment duration also improved the chances of earning FD-beating returns, i.e., more than 8%.

Conclusion
Spending time in the market may sound boring, but it is effective. If investors are able to give enough time to their investments, they will automatically improve their chances of earning good returns.

(The author is COO, ET Money)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of Economic Times)