Timing the market is a fool's game!

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." - Peter Lynch

Time in the market is more important than timing the market, they say. Is this true? We do an experiment to compare a perfectly timed portfolio against a long term portfolio (with no timing at all).

The results of this experiment are interesting. The perfectly timed portfolio, obviously does better than the long term portfolio - but not by as much as you would think. The reason for this is that stock price movements are largely driven by growth in earnings. Invest in fundamentally strong companies and you will earn money.

Our experiment is easy - Assume we have two investors, who both invest INR 10,000 annually in shares of Asian Paints. Let's name the 2 investors - Mr. Special and Mr. Ordinary.

Mr. Special has a special gift from the Almighty. He can perfectly time his stock purchases each year for the lowest price during the year.

Mr. Ordinary is like the rest of us muggles - he does not know how markets will move so he purchases Asian Paints shares on 1 April of every year, irrespective of stock price.

Mr. Special and Mr. Ordinary invest in shares of Asian Paints from 1 April 2010 for 10 years. For example, Mr. Ordinary invests INR 10,000 in Asian Paints at Rs 203 per share on 1st April 2010. Mr. Special, meanwhile using his special gift, invests INR 10,000 on 21 May 2010 when stock price is lowest.

This continues and there are significant price difference in their investments. For example, Mr. Special's purchase, at the lowest price point during FY14 is 21% lower than Mr. Ordinary’s.

At the end of their ten-year investing cycle, the two investors compare their portfolio values.

Mr. Special’s portfolio is worth ~INR 3.6 lakh, an XIRR of 22.6%.

Mr. Ordinary’s portfolio is worth ~INR 3.4 lakh, an XIRR of 21.7%.

You can observe that the difference in their portfolios is not significant. In the real world, no one is Mr. Special. So forget about trying to time the market and invest regularly. Regular investing with a long term approach is the way to achieve consistent returns!

Note: These portfolio values do not include dividends – they are based only on share price movements. Including Dividends will increase the XIRR numbers by 1-2% for both investors.

If we consider investing in the Sensex (instead of Asian Paints) over any 10-year time period after 1991, the outcome is still similar.

Mr. Ordinary’s 10-year portfolio value would have been 80-95% (average of 83%) of Mr. Special’s portfolio value.

If we increase the time frame of investment of each portfolio from 10 years to 20 years for any year after 1991, the outcome would still be the same!

Mr. Ordinary’s 20-year portfolio value would have been on average 82% of Mr. Special’s portfolio value if invested in Sensex, and an average of 85% if invested in Asian Paints.

The answer here is simple - LONG TERM INVESTING. Build a portfolio of strong stocks and forget about it for 5-10 years. These will give you significant returns over the holding period. Even Warren Buffett can't predict what will happen to the market tomorrow, but he knows his companies are fundamentally strong.

Make a Coffee Can Portfolio like ours and we'll see you in 10 years!

Disclaimer: This post was inspired by a Chapter in Marcellus Invesment Manager's "Investing through a Crisis Handbook" available here.