If there was a survey for the most commonly asked investing-related questions, there is one particular question that would trump all the others by a huge margin. You would surely have asked this same question multiple times, to yourself, your friends or to any number of financial experts that may have crossed your path.
Is now a good time to invest in stocks?
Yes, this could very well be the holy grail of everything investing-related. To know when is the perfect time to buy or sell stocks is like finding the lost treasure of Atlantis. The question itself comes in multiple variations such as should I book profits, or should I invest in stocks or wait for 6 months, etc. Here is a list of possible answers that you would have heard when you asked this question.
A bull market is about to start or is already underway. You should BUY, BUY, BUY!
A bear market is about to start or is already underway. You should SELL, SELL, SELL!
Markets are too overpriced. Don’t buy right now.
Markets are too under-priced. Buy right now.
The trend is going to change. Wait for some time.
Invest systematically every month, or at regular intervals.
Which one of these answers should you listen to? The problem gets worse because, if you ask 10 people at the same time, each one of them will give you a different answer and each one of them will sound like they know exactly what they are talking about!
Numbers don’t lie
Let’s do an interesting exercise. Using monthly historical data of Nifty 50 Index starting from 1 January 2003, let’s compare what would happen if we tried to time the market versus if we invested systematically.
Scenario 1: Systematic investing
In the first scenario, we will assume that we invested a fixed amount at the beginning each month without considering any of the confusing jargon like market conditions, bull, bear, trend, etc. Let’s say that we invest Rs 100 every month. Over the course of the next 172 months, we would have invested Rs 17,200 and its current market value would be Rs 44,981. That gives an annualized return of approximately 12.56%.
Scenario 2: Timing the Market
In the second scenario, let’s see what happens if we take the same Rs 17,200 that we invested through SIP and invest it equally on 10 random dates during the 14-year period. Can you guess what the current market value would be in the second scenario? In 10,000 randomly generated simulations, the final market value was on average Rs 44,968, a difference of Rs 13 from the SIP scenario! To summarize, the result was virtually identical to the systematic return.
What does that mean?
What this means is that, if you do it for a long enough period of 20 or 30 years, you will end up with exactly the same result in both cases. You get no benefit of trying to guess the best time to buy/sell in the market. There may be times when you get lucky and buy at a low point in the market, but they will eventually get offset by the times when you waited too long to enter.
The performance of stock markets over long term is a culmination of tens of thousands of complex factors which no one can predict unless they have a time machine in their backyard. Financial experts try to predict what will happen in the markets in the next month, year or decade but their guess is usually as accurate as a coin toss.
So, instead of asking “Is it a good time to invest?” you are going to be much better off asking “How soon can I start investing?” Save and invest smartly and systematically without worrying about short-term ups and downs – that’s the only sure-shot path to securing your financial future.
The author, Harsh Vardhan Singh is Co-founder & CEO of Tauro Investment Advisors.