Nirav Panchmatia, a Nagpur-based chartered accountant and founder of AUM Financial Advisors, often comes across potential clients wanting to know which way the benchmark indices, Sensex and Nifty, would move from the current levels. The next common question that financial experts like Panchmatia encounter is: "When is the right time to invest?"
Similarly, when gold started touching one high after another, many wanted to start investing in it. This query continued each time gold prices inched higher. Most recently, investors wanted to know if they should lower their gold holding after the price started falling.
The answer to all the above questions: think long-term and don't time the market. The latter can hurt badly.
"These questions largely come up because investors are used to investing based on historic data. While that is important in terms of choosing the right product, past returns of an asset class are no surety of future prospects. That is the main reason why investors sell on troughs (fear of losing more) and buy on peaks (greed of gaining more)," explains Anirudha Hatwalne, a chartered accountant and financial planner from Aurangabad.
Most investors believe they need to know the market movement (read time the market) to be able to make money. However, 'timing the markets' is defined as buying when the prices hit a bottom and selling when they peak. In reality, the opposite happens.
Why not time the market?
Timing the market leads to taking a lot of risk on your books, warns Pankaj Maalde, head - financial planning at Mumbai-based Apnapaisa.com. "There are many big and small factors governing the market movement simultaneously - national, international, political, geo-political and economic. One will never know which event/factor will lead the market which way. Sometimes, there are clear signals of an uptick but the stock prices fall. Why should one want to ride on unpredictability?" he asks.
A classic example could be the bull run in stock markets in the pre-2008 crisis. Many entered the market in December 2007 to take advantage of the soaring stock prices and have not been able to recover their capital till date.
Agrees Kapil Narang, chief operating officer of Ameriprise India, "When an investor tries to time the market, the bigger picture is overlooked in favour of short-term profits. As a result, investors may end up making or exiting investments prematurely or unduly late. Such a short-term approach can be detrimental to the long-term gains and can also force wrong investment decisions. Remember it's your time in the market rather than timing the market that determines your success."
According to Panchmatia, markets cannot be timed ever, by anyone. It is almost impossible to call the peak and bottom with accuracy. Those with 'I sold all my stocks at the right time' tags just got lucky. Do not fall for such claims. Even the new-age systems and algorithms can fall on their face in a widespread bloodbath.
Those who invest or disinvest based on market movements or expected market movements are purely speculating. You can either speculate or accumulate, but never both, say experts. "It is very critical to understand that what may work for an institutional/ultra HNIs (high networth individuals) may not work for individuals. A large investor is a regular trader who tracks the market in-depth. However, an individual neither has the volume, time nor the market efficiency to do the same. Therefore, following a bigger investor can have negative repercussions," warns Narang.
What should you do?
According to Annual Wealth Creation Study, a study on wealth creating companies conducted by Motilal Oswal Securities in December 2012, investing in equity isn't really about catching the spurt in stock prices but about identifying a company's potential to create value and sticking to the choice in the long run. This underlines the basics - don't try to time markets and invest for the long term, based on company fundamentals.
Maalde says even lumpsum investment should be avoided. "Follow the systematic investment route. If you have a lumpsum, break it into, say, 12 parts, and invest over a period to make the most of different market levels. This helps make the most over the long term with cost averaging."
Ideally, an investment decision is a factor of an investor's risk profile, time horizon and financial goals. It is these three elements that determine the asset allocation an investor needs to follow. Always invest your overall assets appropriately across different asset classes to reduce the risks and earn the most, says certified financial planner Vishal Dhawan.
Following every short-term trend could harm your portfolio as the asset allocation gets disturbed too frequently. In the attempt to catch the latest trend, you could end up missing the bus on both sides. Consider rebalancing your portfolio periodically but don't confuse it with frequent churning. Move out of an asset only if there is a genuine need for it. For example, if you are nearing a goal, it makes sense to move to debt from equity.
For risk-takers, Dhawan suggests experimenting on a minuscule part of the portfolio. "For instance, if you have invested 50 per cent in equities, you could take risk on up to five per cent of the portfolio. But, not everyone has the expertise and knowledge to do the same. This is especially not advisable to do with the goal-linked part of the portfolio or your future plans will get messed up," he says.
