Are you one of those who wait for the markets to take a dip so that you can start investing? Or are you among those who want to book profits when it is on the rise? There is nothing wrong with these sentiments in general. However, the ways of the market can be really cruel.
Imagine this. You had stayed invested in the markets for 99 per cent of the past 10 years. But, in the remaining one per cent time, the markets rewarded patience with abnormal spurts.
The difference between the overall returns you made while staying invested throughout and missing those critical days can be telling.
As per a study done by BS The Smart Investor some time back, it is a better proposition to stay invested in the market rather than trying to time the markets.
For a 24-year period starting in 1979, you would have made a 50 per cent return if you were good enough to time the market perfectly, that is if you managed to stay out of the worst 72 months during the period.
But alas, the percentage of those who have had the foresight and will to get out when things got tough would be negligible. On the contrary, if you were a lousy timer, say missing the best 20 months during the period, your annualised return would even have turned negative.
The key finding here is that if you had simply invested in the Sensex and did nothing for those 24 years, the index would have given a compounded annual return of 15.90 per cent.
Weighing the balance, especially considering there is no knowing when the markets might rise or crash, it makes sense to stay invested throughout or till you achieve your financial goals.
"Investing for the long term has been historically proved to be more beneficial -- and it stands true in today's markets too," notes Hemant Rustagi, chief executive officer of financial advisory firm, Wiseinvest Advisors.
The problem with stock markets, as you would have known by now, is that they are prone to immense volatility from time to time. There are days or months when the market soars or plunges and those brief swings account for practically all of the market's gains or losses over decades.
What is the better way to avoid the kind of risks involved? Stay invested at all times so that you don't miss the big moves when they happen.
It has to be kept in mind that short-term price movements are more often than not affected by a variety of factors such as market sentiments, rumours, liquidity, which may not have anything to do with stock fundamentals.
However, experts note that prices do tend to align themselves with fundamentals over the longer term. While there may be many who will nudge you to take action at every fall or rise, it has to be borne in mind that the risks involved in guessing market movements far outweigh your chances of success.
In other words, over the longer term, market timing is a losing game for small investors.
The lesson for small investors: forget timing the markets, it doesn't pay in the long run.
The easier and safer way to make money is by investing regularly and, more importantly, by staying invested during the highs and lows which will improve your chances of profitability.