Often, investors face the dilemma of whether to invest in equities when the markets are high or should they take a pause for some time till the valuations seem attractive. ‘Buy low and sell high’ is the argument used to justify such thoughts. And this justification leads to procrastination from investors who would stop their regular investments and sit on the fence waiting for a large correction to happen. Does this make sense?
On the face of it, this seems to be logical thinking however, we all know the devil lies in the details and here the details will be revealed by data. So, let us deep dive in the data and find out if we can extract some answers.
To get the data we assumed three regular investors – Ganesh, Rajiv, and Neeraj. All these three investors have different perceptions about the market and investment and hence different investment philosophies. Ganesh is a naïve investor who would like to time the market however, he would somehow end up investing in the highest index point in the month. On the other hand, we have Rajiv who is a suave investor – one who understand the market pulse accurately and would invest at the lowest index point in the month. We also have Neeraj who believes in the disciplined approach and would invest on the first working day of every month irrespective of the market scenario and would enjoy life by giving more time to family and community rather than spending time on getting his market predictions right.
Let us assume all these three investors start investing ₹ 10,000 monthly from January 2000. Also, we are assuming that all three are investing in Nifty 50 price return index. As described earlier Ganesh is regularly unfortunate and invests at the highest index point monthly; Rajiv is perennially fortunate and invests at the lowest index point and Neeraj is investing via systematic investment plan on the first working day of every month. (Please note, since this is backward simulation, we can figure out the highest and the lowest index point with precision. In real time this may not work consistently over long periods of time.)
What do you think should be the differential in the corpus? Theoretically we may be thinking of a huge differential in the corpus of Ganesh and Rajiv with Neeraj securing his place somewhere in between. This is true to some extent, however, let us check the numbers to understand the correctness of our hypothesis which is when we are regular and long-term investors does timing the markets makes sense? What we have assumed here is that all three are investing ₹10,000 per month over a period of 253 months (slightly over 21 years starting from January 2000 till January 2021)
The difference in the corpus between the luckiest of the lot (i.e., Rajiv) and the market neutral investor (i.e., Neeraj) is ₹ 5.56 Lacs. Imagine the kind of time devoted and research work done by Rajiv to get the markets right consistently over the past twenty-one years! Also, by the same logic can someone be as unlucky as Ganesh every time for the past twenty-one years? In realistic scenario, both are extreme cases. Even if we consider such extreme cases as real time cases do the effort justify the excess returns generated?
Some of us may argue that twenty-one years is too long a time frame and there may be substantial differences over shorter periods. So, let us check the same data for the past ten years find out the difference.
Here the difference between Rajiv, the fortunate investor and Neeraj, the market neutral investor is paltry ₹71,942. If you still want to drill it down further let us observe the data for five years.
Here Rajiv has earned additional ₹24,678 for all his efforts over a period of five years. While there is no denying of the fact that Rajiv is earning more than Neeraj or Ganesh but considering the time and energy used in predicting the markets month on month does the effort justify the additional returns generated?
In all the three instances, Ganesh seems to be terribly unfortunate. However, if we calculate he has earned returns of 11.95%, 12.05% and 10.71% over 21 years, 10 years, and 5 years, respectively. If we empathize with Ganesh, we will realize that despite investing on the highest point of the month he is still not far behind the suave investor like Rajiv.
Based on the data we can conclude that timing the market movements may make some difference in our portfolio returns however it may not be substantial enough to work only on such strategies. The more important aspects will be to maintain the discipline of regular investing and have a long-term view when we consider equity investing. With this strategy we will make a decent corpus over long periods of time with relatively minimum efforts.
This philosophy of investing regularly and maintaining focus can be interpreted from the lines in the epic poem Madhushala by Shri Harivansh Rai Bachchan:
अलग अलग पथ बतलाते सब पर मैं यह बतलाता हूँ,
राह पकड़ तू एक चला चल पा जाइएगा मधुशाला||
2 thoughts on “Nifty above 15000. What should regular investor do?”
Well explained with very practical analysis.
To good study Vivekji. Out of box thinking.