Time in the Market or Timing the Market?

The most intriguing aspect of stock market is that diametrically opposite views can persist side by side for long period of time. The simple way to prove this is to ask a diverse group of people about  the “right” way to invest. The young and energetic will advise to practice timing—buy low and sell high; while the seasoned and experienced ones will insist that merely giving enough time to your investments is the right prescription to reasonable returns.

For an “aam” investor both the strategies are equally intimidating. Finding “the” right way to invest is a nightmare for many if not all of us. Fortunately, history has the answer we all seek.

Data from 1990 onwards suggests that probability of suffering a loss reduces to zero as the investment horizon lengthens.  As a corollary, minimum positive returns generated increases with time. Investors who strayed in the market for 10 years or more never lost money, irrespective of whether they invested at high or low levels. The proof is for you to see click on the link below to open the excel sheet.

Summary of Observations
		Returns (%)
Date	Sensex	1 Year	3 Years	5 Years	7 Years	10 Years	12 Years	15 Years
21-Dec-84	272
23-Dec-85	527	94
24-Dec-86	524	-1
24-Dec-87	442	-16	18
23-Dec-88	666	51	8
01-Jan-90	783	18	14	24
24-Dec-90	1048	34	33	15
01-Jan-92	1957	87	43	30	33
24-Dec-92	2615	34	49	43	26
24-Dec-93	3346	28	47	38	30
23-Dec-94	3927	17	26	38	37	31
01-Jan-96	3128	-20	6	24	25	19
01-Jan-97	3261	4	-1	11	23	20	23
01-Jan-98	3696	13	-2	7	20	24	18
01-Jan-99	3060	-17	-1	-2	7	16	16
30-Dec-99	5006	64	15	5	10	20	22	21
01-Jan-01	3955	-21	2	5	2	14	16	14
01-Jan-02	3246	-18	2	0	-3	5	13	13
01-Jan-03	3390	4	-12	-2	1	3	10	15
01-Jan-04	5915	74	14	14	9	6	10	16
31-Dec-04	6603	12	27	6	9	5	8	15
30-Dec-05	9398	42	40	19	17	12	9	16
29-Dec-06	13787	47	33	34	16	16	11	14
01-Jan-08	20301	47	45	43	26	19	17	15
01-Jan-09	9903	-51	2	11	17	12	10	8
31-Dec-09	17465	76	8	21	26	13	14	10
31-Dec-10	20509	17	0	17	19	18	17	13
30-Dec-11	15455	-25	16	2	13	17	10	11
01-Jan-13	19581	27	4	-1	11	19	14	12
01-Jan-14	21140	8	1	16	6	14	17	14
Yearly Rolling Returns		29	27	25	23	20	18	15
Negative Returns		8	4	4	1	0	0	0
Summary since 01 Jan 1985
	1 Year	3 Years	5 Years	7 Years	10 Years	12 Years	15 Years
Yearly Rolling Return Observations	29	27	25	23	20	18	15
Negative Return Observations	8	4	4	1	0	0	0
Loss Probability (%)	28	15	16	4	NIL	NIL	NIL
Median Return (%)	17	14	15	17	16	14	14
Average Return (%)	22	16	17	17	15	14	14
Max Return (%)	94	49	43	37	31	23	21
Minimum Return (%)	-51	-12	-2	-3	3	8	8
Standard Deviation (%)	36	18	14	11	7	4	3

(Source:-HDFC Mutual Fund)

From a 28% probability of losing as much as 51% of your money to 100% probability of earning positive return over 10 years despite a 2008 like apocalypse hitting the world markets. It is amply clear that a simple strategy of “time in the market” is a sure shot way to reduce/minimize the market risk. But is protection against losses the only reason for investing in equity mutual funds? What about the rewards?

A median return generated by investments across different time periods is a good indicator of rewards of “time in the market” strategy. In the table as linked to this write up indicates, the investments have delivered a median return of 16% CAGR over a 10 year term. Hence, the case for patient investing is a strong one.               

However, patience has its constraints. Though investments are supposed to be made for long term, investor mortality rate is quite high. Many investments do not survive for long. A 10/20/30 year journey is made of many short ones, which is financial equivalent of a roller coaster ride. To reap handsome rewards of the long  term, one has to survive the short term.

For example, investors who invested in the euphoria of 2007-2008 rally, have witnessed horrific destruction of their wealth by 2009. Contrast this with investments made towards the end of 2008 or in early 2009, would have clocked annualized return of nearly 20% over the last 5 years.

Many of the former category of investors would have either lost confidence in the market and quit the market with a deep loss and moved to the safe environs of bonds, FMP and bank deposits.

On the other hand, the latter class of investors, has had a good investment experience. The investment performances have been good enough for them to contemplate further  investments.

The difference in the experience of two classes of investors as above can be solely attributed to “market timing”.

There is a class of investors who swear by “market timing”. For them buy low and sell high is the only strategy to generate returns. Over the years “market  timing” has come to be synonymous with “speculation”.  Such investors can never be expected to reap the full benefits of long term as shown in the table above, since their outlook is and can never be long term.

We believe that the side effects of “market timing” can to a large extent be removed by adopting “time in the market” strategy. This “hybrid” strategy (combo of market timing and time in the market) ensures that you do not lose money by continuing with the investment made at “high” point of the indices.

Scheme	Inception date	Value of Rs. 10,000(as on 30/11/2012)invested
		at  inception	on 03/01/2000
DSP BR Top 100Equity Fund	03/10/2003	1, 14,630 (28.49%)	NA
DSPBR Equity Fund(*)	29/04/1997	2, 24,153 (22.06%)	68,577    (16.07%)
HDFC Equity Fund	01/01/1995	2, 76,571 (20.56%)	1, 11,655 (21.00%)
HDFC Top 200 Fund	11/10/1996	2, 61,295 (22.66%)	80,913     (18.00%)
Reliance Growth Fund	08/10/1995	4, 92,000 (25.75%)	1, 12,005 (21.00%)

An investment of Rs. 10,000 made on euphoric days of tech rally (03/01/2000 to be precise), would have been worth 68,577/- (as on 30/11/2012)—an annualized gain of approximately 16%.

We believe that the best way to practice the fail safe principle of “time in the market” is to align your investments to your life’s goals. However, while theoretically this should be enough for a successful and rewarding investment experience, in reality it needs one more element – a disciplined and systematic investment regimen.

Facilities such as these combine the best of both worlds and allow a long-term investor to remain truly long-term and reap the benefits of generating inflation adjusted returns.