There is a popular saying in the investment world – Investors who make money buy at the bottom and sell at the peak. A lot of new investors take this statement too seriously. Is there a problem? Yes, there is a problem with this approach.
The problem is to achieve this – you need to time the market. Yes, some investors make money using the above method, but only a handful of them do. A retail investor with limited information and understanding of the market cannot do it. However, investors try to time the market, and they keep on waiting.
Let us first try to understand peak or market high. There is no question in the long run, the market will go in one direction – up.
Let us understand it with an example. There is a train starting from point A and going to point Z, as shown below.
The only thing about this train is that it is a passenger train and it can change directions depending on the demand of passengers in any city. For example, if it is currently at station C and passengers at station B are high in number, it can reverse direction to pick them up. One thing is sure – it will reach station Z.
Your destination is Z – now the question is – if the train is at station C (and so are you), will you board the train, or will you wait? It is a simple question to answer – the train going back to station B is not 100%, but it will go to Z is 100%.
Another problem is if you don’t buy at the current peak and correction does not happen – you invest at a higher price. NIFTY was around 15800 in mid of June 2021. It has gained over 1500 points very quickly and was at its peak. Many investors had not invested at that point since it was at its peak and waited for correction. The correction never happened, and NIFTY almost touched 18000 recently. What have investors who waited for the correction, missed? A gain of 14% in less than four months, isn’t it a lot?
Many of you would say – what if the market had corrected? The market could correct from any peak. However, when we talk about investing, we don’t talk about putting money for months or a few years. It is always long-term, so let us look into the past and see what happens if someone invests at the peak.
Case 1
The SCAM 1992 just completed one year, and most of you would have seen it. So you must be known in 1992, the market was at its peak, and the market crashed after the scam was made public.
The fall in 1992-93 was close to 50 percent. Someone who had invested at peak would have seen their returns as below:
- one year return: -46.77%
- five years return: -4.76%
- ten years return: -2.15%
- Return till date: 18% (approximately)
18% returns can create a fortune for you and would have for many people. Now many would argue, 1992 was a long time back.
Case 2
Let us talk about something more recent – the 2007-08 sub-prime crash. During this fall, the market corrected by 56.17 percent, and the returns are as follows:
- one year: 52.45%
- five years: -0.85%
- ten years: -5.35%
- Till date: 8% (approx)
Many would argue that 8% returns over 13 years are nominal. Yes, it is. But then you need to understand, 8% return is when you invested at the peak back then and never invested anything post the fall. Such things don’t happen, as every investor keeps on investing. Even if you came back in 2010 and started investing, your cost would have averaged out, and you would have much higher returns now.
Another essential point to note is – above two scenarios are related to market crashes – a fall of more than 50%. When we talk about corrections, it is about 10-20%. The impact would be even lesser and returns higher.
From the above two scenarios, it is clear – a long-term investor loses a lot if the correction does not happen and does not lose anything significant if it does not.
To sum up, you will never know if this is a peak or the start of a bull rally. The moral of the article – Even if it is a peak and correction happens from here, a long-term investor should not worry. JarvisInvest never suggests investors invest a lump sum amount at the market peak and watch their faith unfold. The right investment strategy is to keep your SIPs in stocks active and not overthink the market level too much. You make money when your money is in the market and not in the savings account.If you are picking individual stocks, you should be a bit cautious while picking them at their peak. There is a lot of bias that can happen, and you may make a poor investment decision. If you want to make sound investment decisions even at the peak, you should check JarvisInvest – it keeps aside all emotions and selects stocks for you using its powerful AI algorithms.