It is the endeavour of every equity investor to buy at the lowest level of the market and sell at thehighest. However, this is a task which is easier said than done. Why is it so difficult?For starters, it is impossible to tell if the market has peaked or bottomed out as it is the collectivebuying and selling of all participants in the market which determines the price. So, while one can geta sense of whether the market is expensive or cheap – there is no sure way of knowing if the marketis going to get further cheaper or more expensive before it starts trending back towards the mean.Secondly, the market is not linear. So, the up moves and down moves happen in spurts. Andsometimes from the depths of despair rises a day of exceptional performance. To put this inperspective, if one were to remove just the best 10 or 20 days of the market in the last 20 years orso, almost the entire market performance would be gone. A study by J P Morgans Retirement Guide(Jan99 to Dec18) of S&P 500 shows the impact pulling out from the market has on the portfolio interms of CAGR returns.S&P (full invested) 5.62%S&P (missed 10 best days) 2.01%S&P (missed 20 best days) -0.33%One can study for different phases over similar long terms and the impact can be dramatic. Clearly, ifwe are trying to time the market and for whatever reason are not able to predict the 10 or 20 bestdays even over a 20-year period, we can have sub optimal returns in the long run.Further, there are myriad of other reasons including the rapidly evolving economies, change inbusiness dynamics, constant emergence of winners and losers as well as central bank role ininjecting and removing liquidity from the market – all of which can have far reaching consequenceson the short-term movement of the market.So, the term “time in the market” tries to address this by ensuring that we are in the market, and wetake the good days in stride (along with the bad days). Long term trend of the markets indicates thatdespite its volatility, over the long term (> 5 years) equity is the best asset class for higher returns.And therefore, if we don’t miss out on the good days, it is apparent that despite the bad days theoverall returns are by and large superior to any other investment. The whole concept pf passiveinvestments stem from this philosophy of time in the market, especially when we know that themarket itself should do reasonably well over long periods of time.So, should we only believe in “time in the market”?Our experience at Fission Wealth has been that if we can put in some non-biased and data-basedtriggers, then we can get a reasonable sense if the market is heated up or providing value. While wemay not get it right every single time in terms of the direction of movement from this point, we canuse stagger (e.g. Systematic Transfer Plans) to do a longer stagger for fresh investments if themarket seems to be heated up to try and capture downsides (if they occur) and shorter staggers orlumpsum (if market appears to be giving value e.g. at the point of crash due to Covid) to capture theimminent upside. Similarly, there are many other tools which can be used to try and take advantageof this understanding. If we get this right often, we may be able to generate an alpha over longperiods of time.
India, thankfully, is in a position where she can provide at least a decade of sustainable growth. Thisgives us comfort that the direction of Indian markets is likely to be positive and the equity asset classover the coming decade should replicate the past (and be the best asset class for long-term investingin India). Therefore, all investors who are looking at long term sustainable returns from theirfinancial assets should look at equity to the extent of their risk appetite and aligned to their overallasset allocation.So, we come back to the question – what should we do? Adding a small dose of understandingmarket levels and fundamentals of equity can give an edge to portfolio performance. However,there is no running away from “time in the market” along with common sense investing forconsistent superior returns from the best long term return asset class such as equity.
コメント