- The market is near all-time high, should I invest now?
- Should I wait for markets to fall before I invest?
- Should I redeem some of my mutual funds or stocks and move them to fixed deposits now that rates are higher?
These are the most common questions I get to hear in the last one-two months.
Market Timing – 2D (Donald & Demonetisation)
But before I answer this question, let me tell you a story. In November 2016, I took a partial cash call and sold around 25-30% of my holdings. My rationale was that the US elections was happening on Nov 8th the results would be declared. Hillary Clinton was expected to win. My bet was that Trump would win and that was likely to trigger a fall in the US markets which could possibly cascade here. It was more a tactical trading call with the intention or hope of buying stocks 10-15% cheaper. Well, Trump won. And nothing happened in the US markets. It did not budge, either up or down. And in India, we had the announcement of demonetisation on the same day. In the next few trading sessions, the Nifty corrected sharply and fell below 8000. I got lucky with my market timing call but for something I had no inkling of.
The reason I tell this story often is because it highlights the challenge of short-term market direction and level determination. No one knows what will happen tomorrow, or a week from now, or a month from now. Over longer time horizons, it is slightly easier to do basic trend analysis. For example, it is relatively safe to say that Indian GDP will be much higher than what it is today.
This leads us to the question of investment horizon. One of the most important questions in investing is to determine your time horizon. If you are planning to invest and build a corpus over the next 10-20-30 years, then the least you can do is to ignore the vicissitudes of the short term.
The 1-in-4 Rule
- I have this rule that I always keep at the back of my mind. It goes like this.
- 1 in 4 years will be bad where we will lose money.
- 1 in 4 stocks will not play out the way we thought it would.
- 1 in 4 stocks we will get in or out too early or too late.
In addition, once every year, we are likely to see a 10% fall in the markets. Once every 2-3 years, a 20% fall and once every 8-10 years a 30%+ fall.
The problem is we don’t really know which of these we are in now. Is this the one year where we will lose money? Or is this the stock which we are making a mistake on?
Since we don’t know if this year will be that bumper year or that bad year, the most rational thing to do, if we have a long-term horizon is to remain invested.
Once we understand this, it is easier to handle the ups and downs. Plan for the occasional speed breaker on the road. It is not that you leave your house only when you know that the road to your destination is all clear with zero traffic. You get out on the road and make the journey. Along the way, sometimes the traffic is slow, sometimes fast and if there are diversions you take them as long as they take you towards the destination.
It is exactly the same here. Just keep in mind the destination in this journey is to compound your capital at a reasonable rate over your investment horizon and not make large capital losses.
Sometimes, waiting for the right moment to invest backfires. What if the market does not fall to the extent you expected? What if the market falls, but you get more scared to invest then? Or what if, the market falls, and you wait for it to fall more, but it doesn’t? These are all scenarios I have seen play out in front of my eyes.
What is the way out?
In one word – SIP. Mutual funds have popularised this concept of rupee cost averaging. Anyone who has a regular income stream should follow a SIP regime. Not necessarily in mutual funds but in their own portfolios. Instead of trying to time the market, it is better to benefit from regularly putting aside a sum. The advantage of a SIP model of investing in our portfolio stocks is that you slowly accumulate stocks in good companies during market downturns and sideways periods, which shows up in your CAGR returns when the market turns up.
The future is unpredictable. Have a savings and investment plan based on your investment horizon. And then, most importantly, stick to your plan.