- Should I keep investing in my SIP?
- Is it the market bottom?
- Will the market turn-around this week?
- When should I start investing?
If you invest in the markets, these are questions you have probably thought about over the last few days, weeks, and months. Well – there is some good news. If you plan to invest over a long horizon, determining the best time to enter isn’t that important. Let’s look back at the last few decades of the Sensex index returns.
Assuming that you invested in a mutual fund tracking this index anytime between 1990 and 2024 for a single year, you would have seen a wide range of returns.
- The best year – investing in at the start of 2009 and selling at the close of the year would have yielded you an astonishing 82% return!
- On the other hand, if you had bought at the start of 2008 and held for that one year, you would have had a return of -52%.
Of course, there was no way of knowing that the financial crisis was going to occur this year. If you panicked at that time, you would have realized that loss. But what if you held for the long run? Assuming you didn’t rupee cost average and simply held for 9 more years, you would have recovered and then sum. In fact, your 10-year return would have been 68%.
We just saw that a one-year (annual) return on the Sensex could have ranged from -52% to +82%, with an average return of 18%, depending on the year in which you started investing. Now, let’s look at the annualized return of holding for 2-years. The best 2-year period had an annualized return of 58%: still fantastic but definitely lower than 82%. The worst 2-year period had an annualized return of -19%. This is far better than -52%. The best and worst 2-year periods were January 1991 to December 1992 and January 1999 to December 2001 respectively. The average annualized 2-year return was 16%.
Let’s take a longer horizon: 10 years. Since 1990, the average 10-year annualized return was 13%. The best 10-year holding period was from January 2003 to December 2012. Interestingly, this period also contained “2008” which was the worst one-year period. The worst 10-year period was from January 1993 to December 2002. You would have had an annualized return of 2.6% (cumulative return of 29%). Going ever further out, the worst 20-year period had an annualized return of 10% while the best 20-year period had an annualized return of 16%.
So, the longer you hold, the less important that “timing” matters. The worst possible entry points end up being not that much worse than the average or even the best.