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Why Timing the Market will not Make such a Big Difference

Logic dictates that buying the lows will make you a lot richer than investing without much thought or analysis. Or, in Nick Maggiulli's own words, 'Why Buying the Dip is a Terrible Investment Strategy'.

We have all heard stories of how friends and family bought so and so share - in the latest example, bought ITC at under 150 INR and sold it at above 250 INR - all within a year - giving glorious returns of 66%. This sounds like an investors fantasy.

I looked at 10 years worth of data from the BSE index to understand how much incremental would I have made if I invested monthly (on a random day of the month) vs on, say, a 90 day low.

Scenario 1

A systematic investment plan that is set to buy the same number of units (the amount would differ) every month - on the 1st, irrespective of the market being high or low.

Scenario 2

An investment strategy where you analyse the market and buy units every month, but what would seem as the lowest point in the month.

Scenario 3

An investment strategy similar to scenario 2, but in this, you buy 3x the units, every 90 days, timing the market and buying at the lowest perceived point.

Source : https://www.bseindia.com/Indices/IndexArchiveData.html

Buying on the same day every month may seem dull and even at time counter intuitive, and buying at the 90 day low, every 3 months or so, seems like the obvious choice. You track the trend daily, and then make an informed decision - but ofcourse, you can not time the market - you can make intelligent guesses, but the market may go further low or pick up.

The returns over a 10 year period, using XIRR:

In the grand scheme of the investing world, 15.1% ROI is considered very good. Ofcourse 16% is better, but 16% is the highest possible return, possible in hindsight, it's often impossible to know which is the exact day when the market would hit its 90 day low every 3 months.

The unlikely best strategy

Some of you may quite rightly point out - instead of regularly investing in the stock market, a lumpsum invested in March of 2020, March 24th to be exact, would have more than doubled in 18 months (March 24, 2020 to September 7, 2021) giving a spectacular ROI of 2.1 times or 113% growth. It's the stuff of dreams, but, and there is a BUT.

  • That kind of stock market crash comes once in decade, and may take 12 months to recover, or sometimes, decades - as seen during the Great Depression
  • To have that kind of courage and risk appetite to go all in, when everyone around is frantically selling their investments, is rare - to say the least
  • In hindsight, everything is crystal clear. Almost like watching a ship in stromy seas from a drone, 'Ah, the ship should have ideally taken that course'. But when you are the captain, and there's a storm up ahead, it will require years and nautical miles of experience and a bit of luck to safely wade through
In hindsight, most things make sense - when to enter and exit, when to short, which stocks to buy etc. Timing the market is a task next to impossible, however, discipline over a long period of time has its benefits.

Top photo by Alessia Cocconi on Unsplash

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