Timing the Market vs Time in the Market

Patience or Uncertainty — The choice is yours!

Markets have witnessed a steady & significant run-up in 2021. The Sensex rallied from 44,500 last Nov to 60000 this year which is a 33% YoY growth in just over 1 year. While the bull run is structural, some corrections may occur along the way affecting the returns that your portfolio has generated to date. While you may be happy about how your investments have performed so far, we see the beginnings of an FPI pull out, Fed tightening and volatility increasing in markets right now.

This may not necessarily mean capital loss, but you may see the performance of your portfolio dropping within a short period of time. Our research desk data and the investment committee consensus suggests there could be an equity downside in the range of 12–24% in the next 12–18 months.

The big question is, if markets are to correct and we know it, why not stay out of the market right now and enter at lower levels later? There are lessons to be learnt from the 2013 taper tantrum episode in the U.S., where post-pessimism markets rallied about 54% within 2 years, which means that if you had stayed invested during this tenure you would have generated optimal returns as compared to the past market cycles.

As we know, Warren buffet has delivered an annualized return of 20% since 1965. Yep, you read that right, over the last 56 years, Mr Buffett has delivered 20% annually on avg. During this time there have been 3 periods of 5 years each where the Berkshire stock has seen zero returns but he hasn’t sold a single share. Patience is the key to realising returns over the long term.

The really cool fact though is, Historically, only 1% of days in the markets account for maximum gains. This means, in the last 20 years, virtually ALL returns we delivered in just 75 days. Now, what are the chances that we will be able to guess which 75 days these are over the next 20 years? Therefore, The only way you can guarantee any substantial gains is to stay put for as many days as you can, and the way to ensure that is to be in the game for a maximum time altogether.

Entering at a level when the equity market is close to its bottom and exiting when it is near its peak is something every amateur investor dreams about but is a fools’ errand. However, is it equally important to not buy high and sell low? How do we do this? We use a calibrated entry strategy to avoid overexposure but systematically allocate to equities over a research-consensus-driven weighted allocation over a period of time. Additionally, we further allocate to quality portfolios when fear is high, whatever the headlines may say.

Investing in structurally strong stories is a skill that very few managers have managed to hone over the last 2 decades. This has resulted in delivering 10–35% CAGR and a 10% alpha over a period of 3–7 years which indicates that the potential to create wealth by deploying better performing strategies is high.