One of the most provocative and commonly asked questions in investing is “What is the best time to invest in the market?"
Ample research is available on the subject that speaks about the merits of staying invested in volatile markets, highlighting the negative impact of missing out on the best days of the market's performance. On the other hand, these arguments find a counter in the analyses that show the advantages of staying out of the markets during periods of corrections.
Both these analyses have limitations of using historical data. Therefore, it’s important to use these data points in conjunction with other important approaches to answer this holy grail of a question.
Generally speaking, each answer to this question is different based on the context in which it is asked.
For instance, if you asked Google “the best days to invest in stock markets”, the first result will state that “Monday is the best day to invest in the market for traders”. On the other hand, the 6th result indicates that “Friday is the best day to invest in the markets for long-term investors”.
Hence, it is important that we first develop a good understanding of the various types of market participants so that we don’t use the term ‘investor’ loosely.
Traders participate in the equity market with an intention to benefit from volatility. Days with high volatility are the best days for them to trade.
Speculators participate to benefit from favourable outcomes of specific events. They prefer investment periods lined up with uncertain events.
Investors invest money for the long term with an intention to achieve specific financial goals. They abide by a financial plan and deploy money accordingly. For these investors, the best days to invest in the market are those that are outlined by their financial plans and their investment time horizon.
With this context in mind, let's answer ‘what is the best time to invest’ question through three approaches - Historical Data, Human Psyche and Probability Analyses.
Let's assume you had invested Rs. 100 in the Nifty on 1st April, 1995 and had stayed invested till today (across all ~6500 trading days). The value of this investment, as on today, would be Rs. 1325 (implying a CAGR of 10.5%).
During this time period, there were ~3450 days with positive returns. If you, as an investor, had stayed out on 7 of the best days of the market (1% of the total trading days), this investment would have grown to only Rs. 695 (implying a CAGR of 7.5%).
Therefore, based on the historical data approach, patience is key. Considering that we are talking about the long-term investor, just being present on the good days is enough, since we can’t always predict the market.
For this approach, let us try analysing the psychological emotions an investor goes through in his/ her investment lifecycle.
It’s generally difficult for an investor to invest in the falling market than the rising market.
Maximum participation (from retail investors) in equity markets come during the bull markets. During this market phase, the general atmosphere of the economy is positive and we realise greater investment activity. Conversely, bearish markets increase investor skepticism and make them extremely tentative about investing. This behaviour is also reflected through the changes in trading volumes during these market phases.
This doesn’t seem right, does it? Demand in the market increases (with higher prices) when it is performing well, while the demand falls (with cheaper assets) when the market is not performing?
Well, this is how the human psyche influences our investing behaviour. Hence, for long-term investors, the best bet is to stick to their investment plans during volatile markets, while, at times, doubling down on strong fundamental investments which may be discounted during bear markets.
Probability weighted return calculations are an effective tool to compute expected outcomes from an asset class which has multiple probable return trajectories. This analysis can help us understand the expected return from an instrument, say, the NIFTY over a specific time period.
Let’s take an example to understand how this approach can help us answer the key question.
For the sake of this discussion, let's assume that an investor (as defined earlier) is looking to invest in the Nifty ETF for 10 years. The Nifty today is at 15,000 and is expected to be at 50,000 by 2031. This investor is deciding whether to invest in the Nifty today, or wait till it corrects and falls to a lower level.
Since, there is no certainty of a market correction, let’s assign probabilities to the Nifty level over the next 2 weeks:
- Nifty - 12,000; 50% (since the investor feel that this is a highly likely outcome)
- Nifty - 15,000; 20%
- Nifty - 18,000; 20%
- Nifty - 20,000; 10%
Now, if we consider the above-mentioned market levels and compute the probability weighted returns, what we see is that expected outcome is similar to the likely return from current market levels!
Yes, the investor can expect to earn almost the same return over the next 10 years if he invests today (at 15,000) rather than delaying his decision by 2 weeks (13.3% v/s 12.8%).
All these three approaches direct us to only one answer. For long term investors, it is best to get in early, systematically plan our investments over time and stay in through both, good days and bad.
One word of caution here though -
This approach might not work if you have certainty about futuristic market outcomes.
But let’s get real. If you truly knew what the market would do tomorrow, you would not be reading this post and neither would you be doing your jobs. You would’ve gone all out and invested all your wealth on that “certain” market outcome hoping to make a killing of a lifetime.
Author: Vaibhav Porwal (Co-founder — dezerv.)
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