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Home Beginner

Why avoid timing the market?

by Sumit Chanda
August 31, 2021
in Beginner, Investing Basics
Reading Time: 6 mins read
0
What is Recency Bias?

What is Recency Bias?

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If you ask the top ten investors of the world to give you the list of things you should not do, what do you think the list will have? We are not sure of all the five points, but one thing will be common in all the lists – Never time the market. Sadly, even though the fact is well-known, most new investors continue to do it. 

Have you ever made any predictions? We are sure you had – about your favourite cricket team winning the match, whether your friend will turn out for the party on time or not, and so on. How many times have you seen success? Maybe half the time and another half you were not. When you failed to make correct predictions on earlier occasions, there was not much at stake (unless you were betting a big sum!). When it comes to stock market investing and if you are in a bad habit of timing the market, you are losing a lot more than you can calculate. 

According to some investors, it is one of the foolish acts a new investor can do. Let us now discuss why you should not try to time the market. Below are some reasons for not doing it:

A miss can be very costly – Let us assume you are very good at finding good stocks. However, you have a bad habit of timing the market. Recently, you found a stock trading at Rs 50, and fundamentally everything looks attractive. You decide to invest in the stock only when it corrects by 5% – as you want to time it. The stock increases by 10%, you wait for correction. It further increases, and by year-end, it has reached Rs 75. You are still waiting for your 5% correction, but it never comes. The stock price increased to Rs 125 in the next three years.

What have you lost? You knew the stock potential, but you tried to time the market and lost an excellent investor opportunity. 

Some of you may ask – what is the best investment strategy? The rule is simple – you make money by staying invested and not waiting for the right time. If you had invested small amounts in the same stock over three months, you would have averaged your price around Rs 60 and still would have doubled your investment in 3 years.

You may be good at technicals and may predict the stock movement, but the truth is no one can do it with 100% accuracy.

Emotions are very costly – We have mentioned this multiple times that emotion is the biggest enemy of investors. When you try to time the market, emotions play an even bigger role. Hence, it can harm you even more. Let us assume you decide to sell your stock when it increases by 10% more from the current position. It rises by 6% and then falls by 20%. You feel frustrated, and you may sell your stock at the wrong time. 

Hence, we have talked about asset allocation and portfolio management on multiple occasions. When you follow these strategies, you automatically know when to sell an asset. You don’t have to wait for the right time to buy or sell.

Get this straight – There are many tools investors and traders are using to predict the market. Most of them are very useful in most cases, but there are certain things that no one can predict or explain in the market. For example – a loss-making company’s share price increases or a profit-making company’s stock price decreases. You may invest in a company, and some bad news pops up tomorrow morning, and all the predictions made would be of no use.

The myth around timing the market – Some people claim to have made money by timing the market. In most cases, those people have made money in the bull markets. They don’t realize when there is a tide in the sea, all the ships rise. In such cases, all your bets are going to be right as the market is bullish.

Many investors argue that most fund houses and even some big investors time the market and make money. We are not denying the fact and agree with you. The reason they are successful is that they can find a greater fool – the retail investor. It does not work for you because there is no greater fool left!

What is the way out?

Those of you who are timing the market must be wondering – if not time the market, what to do?

Create your own investment strategy. Figure out your goals and in which types of stocks, you want to invest. How much will go to small, mid, and large-cap stocks? Once you have created the strategy and goals, investment decisions will be on auto-pilot mode for you. 

For example, you decide to invest 50% in large caps, 25% in mid-caps, and 25% in small caps. Your small caps investment gives excellent returns and the overall percent of your investment in small-cap increases to 40%. You will withdraw some funds from the small-cap and invest in other funds to reach the same allocation. Simple, right?

Yes, investing is very simple, and there is no rocket science to create wealth over time. However, most investors fail to do it because of their biggest enemy. For all investors, who want to take emotions out of their investment journey, we have created JARVIS for them. It is an AI-driven investment platform. It creates a personalized stock portfolio based on your risk profile and investment horizon. You should definitely explore it.

Sumit Chanda

Sumit Chanda

Sumit has 18 years of experience in BFSI industry, into devising strategy for various functions, Investments and Managing Asset Portfolios. Specializes in Strategy & implementation in sales & operations, Team management, IT implementation, Affiliations.

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