The irresistible desire to time the market for SIP

The irresistible desire to time the market for SIP.

Those who invest in SIPs and Mutual Funds are often found guilty of trying to time the market, and this is a bigger problem than what most people believe it to be.

A lot of investors of the stock market believe in the saying that time in the market is any day more important than timing the market. Though this is a common principle, it does not necessarily have to be true. We, as humans, are often overconfident about our ability to predict the future. This is why we often end up timing the market, or at least, try to do precisely that.

What is funny about this principle is the market will always move in the exact opposite direction of what you would have predicted it to. When you buy the shares of a company believing that this is the perfect time to do so, stocks begin to fall just after you buy the shares. Similarly, when you sell the shares because you think that the company is going to collapse, it races ahead of everything.

And those who believe that they have immunity against such behavior simply because they are investing in mutual funds and not in stocks are also highly mistaken. Even investors of mutual funds try to time their investments as per the ups and downs of the market. When the market is falling, they stop their investment; when it rises, they increase the investment amount. And more often than not, the scheme backfires.

SIPs work best in volatile markets. When the market is at a high, you buy lesser units of your mutual funds. On the contrary, when markets are down, you can buy more units for the same amount. In the long run, this helps you to average out your investment cost. However, if you stop investments when the market is down, you are faced with the risk of lowering your total investment cost. Similarly, if you increase your SIP when the market is rising, you only keep averaging all your costs upwards.

And doing the opposite is not a magical solution to the problem. You cannot stop SIPs when the market is rising, and increase it when the market is falling. Trying to time the market is not going to be of any help. This is because this practice is largely counter-intuitive. Secondly, you can never predict how long the market will go up or fall. So basically, it is quite an unproductive activity to time the market.

 The very beauty of a SIP lies in the fact that it prevents you from timing the market. SIPs require a lot of discipline. You need to decide an amount and a frequency for that amount. And then, irrespective of where the market is, you need to keep investing in that mutual fund. Of course, you can increase this amount yearly as and when your pay increases, but then you need to invest that amount regularly for the decided period. And when markets are volatile, you are sure to benefit from the power of rupee cost averaging!