Whenever markets correct sharply (generally unexpectedly), there is always a temptation to try to time the market. The thought is simple - Let me sell my Equity Investments (as markets will go down further) and I will buy them again at lower levels. Simple really. But is it?
Not at all. In fact, it could possibly be the most damaging thing you could do to your portfolio. Why and how? First, no one knows whether markets are going to go higher or lower in the short turn. Many have tried to predict it and failed and there will always be someone new who will keep trying. Second, the risk of trying to time the market is far greater than any possible gains.
Let us understand this risk - Suppose you had invested Rs 1 Lakh in Nifty 500 in Oct 2003. If you would have held this investment as it is for 20 years (this period includes the global financial crisis, demonetization, COVID crash etc.), in Oct 2023, your investment value would be Rs 18.6 Lakhs, a CAGR of 15.7%.
However, if in the process of trying to time the market (selling your investment and then re-entering later), you ended up missing the 10 Best Days, your investment value would drop to only 9 Lakhs, a CAGR of 11.6%! And if by chance you would have missed the 20 best days, your investment value would be just 5.3 Lakhs, a CAGR of 8.7%!
What's even more interesting is that the best days are generally during, or just after the correction. Thus, if you try to time the markets, it is very likely that you will miss some of the best days and end up re-entering at higher market levels and reducing your returns significantly! Not to mention the transaction costs and taxation impact.
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