How to Time the Market? Right Investment Strategy for Long-Term Success in the Stock Market

Should I invest in the stock market when it is at an all-time high?

Should I wait for a market correction and then invest?

Should I sell my existing equity portfolio when the stock market is at a high and then invest again at a lower price when the market corrects?

To answer these questions, we need to know if it is possible to predict the market trend in advance.

Table of Contents

1.)2020 Expert Predictions: A Lesson
2.)The Danger of Market Timing!
3.)Why does the Stock Market Fluctuate?
4.)Practical Ways To Avoid Market Timing
5.)Asset Allocation Rebalancing
6.)Conclusion

1.)2020 Expert Predictions: A Lesson

In January 2020, the Sensex was at a high of 41,900 points. In an unforeseen turn of events, the COVID-19 pandemic hit the economy, causing the Sensex to fall to 27,600 points in April 2020. With the global economy at a standstill, many market experts, including Goldman Sachs, predicted that the stock market would fall further and there would be no recovery in 2020.

Many investors believed these predictions and withdrew their investments at 27,600 points. They expected to invest when the market fell further.

Another group of investors, despite having money and a falling market, chose to wait and watch. They even stopped their SIPs. (Play Smart with Your SIP: Stop or Continue or Increase?).

However, the stock market defied all predictions and reached 46,900 points in December 2020. It further rose to 60,800 points in October 2021.

Those who exited the market in April 2020, those who waited for the market to fall further to invest, and those who stopped their SIPs all missed out on a huge wealth-creation opportunity in the stock market.

No expert can accurately predict the stock market’s direction in advance.

Even if someone does predict it correctly and the market follows the prediction, it would be a mere coincidence.

2.)The Danger of Market Timing!

Investors who try to time the market to avoid losses may end up missing out on some of the market’s best days, which can lead to significant losses.

Let’s consider the Nifty 500 index from October 2003 to October 2023:

If an investor had invested ₹1 lakh in the Nifty 500 index in 2003 and held it without any market timing, the investment would have grown to ₹18.6 lakhs by October 2023, representing an annual growth of 15.7%.

However, if an investor had missed just 10 of the best-performing days in the market over those 20 years, their returns would have been significantly lower. Missing out on 10 good days would have reduced the annual return to 11.6%. An investment of ₹1 lakh 20 years ago would have only been worth ₹9 lakhs today.

If an investor had missed the 20 best-performing days in the market over those 20 years, their annual return would have been only 8.7%. ₹1 lakh would have grown to just ₹5.3 lakhs over 20 years.

An investor who simply invested and did nothing would have ended up with ₹18.6 lakhs, while an investor who tried to time the market would have ended up with only ₹9 lakhs or ₹5.3 lakhs.

This shows how much opportunity market timers can miss out on.

3.)Why does the Stock Market Fluctuate?

Understanding why the stock market goes up and down can help us understand the possibility of predicting its direction.

In the short term, the market fluctuates based on business and economic news.

Even temporary impacts from business and economic activities can cause significant market movements. News such as election results, inflation, bank interest rates, and forecast reports from large investment firms can all contribute to the market’s short-term volatility.

Good news on a day can be followed by bad news the next. Is it practical to predict how the stock market will react to each news item and the extent of its impact?

However, in the long term, the market’s rise and fall are primarily driven by earnings. The market fluctuates based on the profitability of companies that have issued shares.

If you are confident in the ability of companies to generate income, investing for the long term without worrying about market timing is the only way to succeed in the stock market.

For example, the SBI Large & Midcap Fund has generated an annual return of 19.04% over the past 20 years. If an investor had invested ₹1 lakh in it without market timing and simply left it alone, its current value would be ₹32.6 lakhs.

To achieve such returns, the investor had to ignore all negative market news.

The investor had to remain unmoved by various negative factors and news, such as the economic recession caused by the subprime crisis in 2008, the impact of the slowdown in the Chinese economy in India in 2015,

the demonetization move by the Indian government in 2016, and the economic recession caused by the COVID-19 pandemic in 2020 ( Corona Crisis: STOCK MARKET CRASH! HOPELESS END OR ENDLESS HOPE?).

Only through such extraordinary patience and avoiding market timing could the investor have achieved such exceptional returns.

4.)Practical Ways To Avoid Market Timing

When timing the market, if you predict and anticipate a market downturn and exit the market, hold your money with an expectation to re-enter the market after the fall, the market may continue to rise, leaving you without the opportunity to reinvest at a lower price. This can prevent you from reinvesting.

By constantly exiting and re-entering the market, we disrupt the compounding effect, considered the eighth wonder of the world.

Many people try to time the market because they are afraid of market volatility. Successfully timing the market consistently is practically impossible.

If you want to avoid timing the market, how do you deal with the risk of market volatility?

1. Long-Term Investing:

• Invest in the stock market only when you don’t need the money back for at least 5 years.
• Never invest money that you need to withdraw in less than 5 years, no matter how attractive the market opportunity may seem.

2. SIP & STP:

As an investor, you may wonder what to do if the market falls after you invest. To mitigate this risk, instead of investing a lump sum, invest monthly through SIP/STP.

This allows you to invest at an average price through “rupee cost averaging.”

Even if the market falls, you can use the fall as an opportunity to continue investing. This is the strategy behind SIP and STP.

5.)Asset Allocation Rebalancing

Buy Low, Sell High in Practice

While it’s impossible to perfectly time the market, asset allocation rebalancing lets you apply the “Buy Low, Sell High” principle to a portion of your portfolio.

How it Works:

1. Set a Target Ratio: Determine your risk tolerance and decide on an equity-to-debt ratio (e.g., 70:30).
2. Rebalance Periodically: When market fluctuations change the ratio, rebalance to bring it back to the target.
3. Buy Low, Sell High: By buying more of the underperforming assets and selling some of the outperforming assets, you effectively buy low and sell high.

Example:

• In 2019, an investor invested ₹10 lakhs in a 70:30 ratio (₹7 lakhs in equity and ₹3 lakhs in debt).
• In 2020, due to a market downturn, the equity value fell to ₹4.5 lakhs and the debt value rose to ₹3.2 lakhs, changing the ratio to 58:42.
• To rebalance, the investor sells ₹90,000 from debt and invests it in equity. Buying low happens automatically for a portion of your portfolio.
• By 2021, the portfolio would have recovered faster than a non-rebalanced portfolio due to the low-cost investment during the downturn.
• In 2021, the equity value rises to ₹12.15 lakhs and the debt value to ₹3 lakhs, changing the ratio to 80:20.
• To rebalance, the investor sells ₹1.55 lakhs from equity and invests it in debt. Selling high happens automatically for a portion of your portfolio.
• After rebalancing, the equity portion will be ₹10.60 lakhs and the debt portion will be ₹4.55 lakhs, bringing the ratio back to 70:30. During this rebalancing, we are selling a portion of the portfolio at a higher price.

So, we are able to buy a portion of the portfolio at a lower price and sell it at a higher price. When doing this, there is no need to predict the economic situation or the market trend. We just need to keep bringing our original ratio back. That is enough.

In 2021, after the rebalancing, when the Indian stock market corrected due to the Russia-Ukraine war,

the US economic recession, etc., the impact would have been less due to the rebalancing.

Without resorting to market timing, the above strategies can be used to reduce portfolio risk. Trusting and implementing such proven strategies will strengthen the wealth creation process for investors.

6.)Conclusion

Forget about timing the market and focus on long-term investing for success. While experts can’t consistently predict market movements, staying invested allows you to benefit from the stock market’s historical upward trend over time.

Regularly investing through SIP/STP helps you average out costs and potentially ride out market fluctuations. Rebalancing your portfolio periodically lets you “buy low, sell high” within your asset allocation without needing to guess the market’s direction. Finally, stay disciplined and avoid emotional decisions. Don’t let short-term market movements derail your long-term investment goals.