One of the most used phrases by the Asset Management Industry.
"Time in the market is more important than timing the market"
Without going into the point of how to time the market or why is it important to time the market we look at how much would it hurt if you get the timing wrong HORRIBLY !!
Lets see it through examples.
|Comment||Date Of Entry||Nifty Price||Nifty CAGR at 7530||large cap MF Cagr||Nifty CAGR at 9000|
|At the Top Of Cycle||01st Jan 2008||6144||2.60%||7.65% to .75%||5.50%|
|At the Bottom of Cycle||27th Oct 2008||2524||15.70%||22.1% to 12.35%||21.60%|
|At the Bottom of Cycle||9th March 2009||2573||16.60%||22.5% to 14.5%||23.20%|
|At the Top of Cycle||1st Nov 2010||6120||5.30%||8.8% to 5.02%||9.40%|
- If you time it very badly - Catching the Top of 2007-2008 cycle or the 2010 cycle tops. The Nifty cagr return drops to 2.5-5% and even with mutual funds to 5-8%. That is below Fixed Income Return even when time frame is 5-8 years. This is terrible.
- Even at the next cyclical top like we had Nifty at 9000 the Nifty CAGR barely manages to go close to the risk free return mark like it shows 5.5-9%.
- If you get the timing exactly at the bottom of cycle ( you get a dream about Lehmann / Bear Sterns and Fed ) the returns jump to 15-17% on Nifty and 15-22% with mutual funds.
- After getting the bottom right and also the top right ( now a dream of RBI and Raghuram Rajan rate cut creating a Nifty top ) the returns jump to 21-23% cagr. Even if you were to use MFs the return would be 17-29% roughly. ( Now this is next to impossible.)
- Data Source - www.nseindia.com and www.valuresearchonline.com
Why do Investors get their Entry Timing Wrong.
- There are two major returns the investors get their entry wrong.
- Mis-Selling of Products by Incentivised Sellers.
For example the NFOs / Sectoral Funds in 2007. Remember ULIPs being sold with an assumption of 25% cagr returns by agents.
Close Ended fund offerings in 2014-2015 as it would imply high commissions for sellers. Assumption of 18% cagr for next decade or two.
2. Buyers Beware
There can be a very emotional case made against mis-selling but if its your hard-earned money you got to remember - Buyers Beware.
Also the psychology of buying equities and other products after seeing the success stories and the run in markets / herd mentality continues forever.
- if mis-selling was not enough Investors are not even made aware of the volatility in the Asset. Lack of financial literacy combined with psychological fear leads them to exit the same investments at the worst possible time. Like we saw Mutual Fund Redemptions in 2008/2011 and 2013 and like we are seeing now in 2016 or lack of strong inflows when markets have already corrected 20-25% from peak.
- Apart from lack of financial literacy is Investor expectations from Equities as an Asset Class. The same investor who is ready for 4-5% in LIC, 4-6% in Savings Account , 8% in FD which are all tax free has an expectation of 18-25-30% from equities.
- As an investment adviser i get asked this by my friends -
"Dude if i give you my money will you double it in 2-3 years ? "
- At the same time a bunch of advisers who just extrapolate past returns also come out with excel sheets suggesting 18% returns in Large Cap Mutual Funds. ( This no used to be 25% in 2007 ). I might be wrong but i would believe 4-5 % above the Risk-Free Return or Inflation is an amazing return. From a 8 -15% average Risk Free Return in 1990s to 2010 we are shifting towards 4-9% in next 10-20 years so our expectations should be 9-14%.
How long will it hurt if you get your entry wrong. ( Timing is Bloody Important )
- If you bought at January 2008 at 6100 Nifty.
- Just to get a return of 6% on 10 yr Cagr/20 yr Cagr the Nifty has to be roughly 11000 by 2018. To get a 9% cagr Nifty has 14500. ( Wow if Time in the market is enough an investor today can get a return of 20-25% or 40% cagr in next 2 years. )
- To get a 9% cagr over 20 years Nifty has to be 34000. ( This would imply a return of 13.5-14% from today for 12 years. That i would say is a very tough task.)
- Another example is you bought at a Sensex of 3500-4000 in 1992 Harshad Mehta top and next top in 1994 your CAGR return today would be 8-9% compared to the average risk free return of 12-13%. ( There would be lucky cases of individual investors sitting on some goldmines like Infosys Wipro etc )
- In simpler words - if you get the timing horribly wrong it could hurt you for next 10/20 years.
How to get the timing Right ?
- Let us first accept that timing the market is damn difficult and some would call it impossible.
- But also you got to admit that how majority tends to get the timing horribly wrong. So as an investor one should only try not to get it horribly wrong like buying in 2007 and selling in 2009.
- There are various methods to get a good idea of timing.
- Nifty P-E Model
One can read on this as to how buying when Nifty is above 22-24 p-e hurts and buying below 16-18 is a decent entry point.
Many have written on this. One example - Stable Investor
( As of today we are going into that zone or very close to it on dips and definitely not in the Horrible Time.)
2) Nifty CAGR Model
This is something I have been working on.
Whenever the 5 yr rolling CAGR / 10 yr rolling CAGR or 20 yr CAGR goes below the fixed income returns is a good time to start increasing equity allocations.
( As of today we are terribly placed on 10 yr and 20 yr cagr. This makes me believe every dip from here over next few months is a good time to increase equity allocation. With surety can say that is definitely not the HORRIBLE Time. )
Time in the Market is important but so is it important to not get the Timing Horribly Wrong. If that happens it could hurt you for 10/20 years.
Using a bit of common sense can take you a long way.
Also Equity as an asset class is a must have and my personal belief is over next 5-10-15 years it should do better in relation to other asset classes. But do you use a bit of common sense timing.
Disclosure - This is a personal view and I am not capable of advising on Mutual Funds as am a Direct Equity Guy and a big time believer in Equities.
March 10, 2016
Very good Post Nooresh. Totally agree when you say Equity (Generally Nifty) will do well over next 5-10 years compared to other asset classes. Some pessimists keep talking about Property/Gold doing better in future but they don’t know every asset class moves in up and down cycle. Financial Assets should have great time over next 10 years.
About timing based on my data crunching of different sectors/Index since 1979 I have concluded if we are NOT in bull market (Like Jan 2004-Jan 2008 period or Apr 1988-Apr 1992) AND if I am buying Nifty AFTER 15 months from the TOP most likely I will beat 17% CAGR on completion of 24 months from buying. So, Jul-Sep 2016 could be best time to load up stocks?
March 11, 2016
Not much data crunching required that chart which i was shared in previous post about length of bear markets being 12-15 months gives us your above conclusion. But there is no holy grail.
I believe one should be a buyer in dips from here.
March 13, 2016
Don’t under estimate power of down move in last 3 months (of total 15 months down move) :-).
March 13, 2016
I underestimate my capability of being able to time the last leg and whether it comes or not. Also not every cycle will be same. Have discussed in previous posts.
March 10, 2016
Sir how do u calculate rolling 5 and 10 year CAGR,does this apply only to index or individual stocks.
March 11, 2016
You can use excel to calculate it.