It is well recognized that the stock market is dynamic, unpredictable, and volatile. There are several (macro and micro) aspects that make it very difficult to anticipate stock prices accurately, including politics, the state of the world economy, unforeseen circumstances in the country’s economy, a company’s financial performance, and more.
As investors, we worry about making investments before significant events all the time. It can be the Union budget, the outcome of the next election, or a central bank decision about interest rates. In the stock market, uncertainty never truly goes away. Nobody wants to be the “dumb” investor who makes their investments at the peak and then watches them drastically drop. Thus, we continue to wait to enter into the market.
According to the random walk hypothesis, asset price fluctuations are random. This indicates that past prices cannot be reliably used to forecast future prices since stock prices fluctuate over time. Since the stock market reacts swiftly to new information, making it unable to act on it, random walk theory also suggests that the market is efficient and represents all accessible information.
Any investor should be aware of two prices: the present price of the investment they possess or want to buy, and the future selling price. In spite of this, investors continue to study historical price data and use it to support their present and future investment choices. While some investors steer clear of a falling stock out of concern that it will continue to decline, others won’t purchase a stock or index that has increased too much because they believe a correction is imminent.
The answer lies in the fact that it is impossible to have flawless insight into the future. Nobody can forecast the market with 100% accuracy. Alternatively, we can carry out an analytical study on three different kinds of investors.
The fortunate investor – This is the investor who makes investments in Nifty index at the bottom of the market every year.
The unfortunate investor– He invests in the same Nifty index at the top of the market each year.
The disciplined investor – He makes his annual investment every year in the Nifty index on April 1st, the first day of the fiscal year.
Let’s take an example of where the three investors might put their money in the year 2008. As everyone is aware, the sub-prime mortgage credit crisis in the United States caused a massive decline in stock markets worldwide in 2008. The ‘disciplined’ investor would have made his investment in Nifty at 4734. The ‘fortunate’ investor would have waited until October 27, 2008, when the Nifty was at its low for the year at 2,524, while the ‘unfortunate’ investor would have bought on January 8, when Nifty was as its peak for the year at 6,289.
Let us now examine the returns at the end of 2008, arranged from lowest to highest: -52.9% for ‘unfortunate’ buyers, -37.5% for ‘disciplined’ investor, and 17.2% for ‘fortunate’ investor. We all fear being the investor from 2008 who made their investment on January 8th of the year, just to witness that heart-breaking drop. The ‘unfortunate’ investor in this scenario experiment takes that worry a step further by making annual investments at the peak of the market. How bad will be this investor’s performance?
Let’s imagine that all three of these investors invested a certain amount annually from 2000 to 2023 (like we saw in our above mentioned example for 2008) in order to get a fair judgment on this analysis. Let’s take a moment to consider how unlucky or terrible an investor must be to consistently invest at the top of the market for more than 20 years.
Let’s imagine that after 24 years of investment (from 2000 to 2023), each of the three investors had contributed a total of 24 lakh rupees throughout that time (each person contributing 1 lakh rupees each year for 24 years). Without doubt, the portfolio of the ‘fortunate’ investor would have performed very well. It would have had an internal rate of return (IRR) of 14.8% and a portfolio value of Rs. 1.92 crore at the end of 2023. At 13% internal rate of return, the ‘disciplined’ investor would have ended up with Rs. 1.54 crore corpus. However, take note of what the ‘unfortunate’ investor would have done. With a 12% return, his portfolio would have been worth Rs. 1.24 crore. Indeed, we can observe that it is a noteworthy 35% decrease in comparison to the ‘fortunate’ investor’s portfolio of Rs. 1.92 crore. However, the ‘unfortunate’ investor has produced a return that would have far outpaced inflation, returns from bank fixed deposits, and returns from other debt instruments, even after repeatedly picking the worst times to invest in the market during this 24-year period.
If we compare the three groups of investors’ returns over ten-year rolling periods—that is, beginning a systematic investment plan (SIP) annually from 2000 to 2010, 2001 to 2011, and so on until 2013–2023, in nominal terms, the best 10-year period for all investors was from 2000 to 2010.The worst time frame was from 2006 to 2016, when the financial crisis and the protracted economic recovery mostly affected all the investors. Returns have progressively increased since then, particularly for the ‘disciplined’ and ‘unfortunate’ investor, suggesting that there is less advantage to timing the market perfectly. You would think that the cumulative effect on long-term returns would be disastrous, considering how frightening the idea of investing at the “wrong time” is. However, the truth is that it is only slightly worse. Additionally, it is hard to reliably pinpoint the bottom of the market each year, just as it is impossible to invest at the exact peak of the market. Therefore, simply adopting the mind-set of a ‘disciplined investor’ will yield steady long-term returns that outpace inflation.
This research demonstrates that, once again, time in the market is superior over timing the market. For long-term investors who consistently participate in the stock market, the timing of their investments is significantly less important than we sometimes worry. The evidence shows that even those who are ‘unfortunate’ may generate decent returns with persistent investing over the long run. Over time, even the ‘unfortunate’ investor earned a reasonable return.
This analytical study serves as a potent reminder that consistent investment commitment, rather than perfect timing, is the most crucial component of long-term investing success. We have no control over market swings or the future, but we do have the command over how we behave and maintain a steady investing strategy.
So, the next time you’re hesitant to invest because of market instability or fear of buying at the “wrong” moment, remember that even the ‘unfortunate’ investor in our above discussed investing scenarios surpassed inflation and fixed deposits returns comfortably in the long term.
Final words:
There are still no reliable methods for properly predicting the moves of the stock market, despite decades of research by the most brilliant minds in finance. Returning to our discussion of the random walk hypothesis, stock selection and market timing cannot provide long-term, consistent outperformance of the market. However, by purchasing and keeping a diverse portfolio of companies, such as an index fund, over a longer length of time and making continuous market investments during this longer duration, it is still feasible to make decent money in the stock market.
