Why timing the markets can be risky for investors

Why timing the markets can be risky for investors

2020 has proven to all that it is a volatile year. The Sensex is down by 23 percent year to date, and the market is going through a roller coaster ride. amidst such situations of volatility and uncertainty, it is obvious that even investors are worried about whether or not this is the right time to enter the market. Should one invest in the market, irrespective of the performance levels? Or should one wait for Sensex to take a hit again?

This hypothesis was tested during the global financial crisis of 2008-2009. At that time, it had taken more than a year for the Sensex to hit its rock bottom and correct by 61 percent. Most days gave negative returns. Also, the median return in those days was -1.9%. in fact, on one such day, the market even feel by 11 percent! Investors feel that they should invest in the market on such days and that if they miss doing so, they will ultimately lose out on a lot in the long run.

The same was tested and returns after five years were taken note of. The example of four investors was taken, each of whom had INR 1000 each to invest. Mr. A invested every time the market fell by more than 1.9 percent. Mr. B missed the top 10 days when the Sensex fell the most and invested in the rest of the days. Mr. C and Mr. D missed investing during the top 20 and 30 days respectively when the market fell the most.

What is surprising to note is that after five years, their cumulative investments have somewhat similar returns!

During a crisis, it is impossible to find out when the next big market fall would come. And even when it comes and you do invest some of your wealth, it does not make a huge difference to your total returns in the long run. Thus, while buying an index like Sensex through an exchange-traded fund, it is best to keep investing small portions in a staggered way, and then sit back to let compounding do its magic.