When you invest in the stock market, positive returns aren’t guaranteed. Over the long run, however, stocks have seen an average annual return of over 12%*. New investors can be tempted to attempt to time the market. There is an allure to potentially predicting when the market will go up and only invest on those days.
Unfortunately, this isn’t possible and while the markets can provide a positive return if you buy-and-hold for years, there will be periods of volatility. For example, on an average day, the Nifty returns 0.04% - for every 10,000 invested, the market will return 4. Over the last 15 years, the Nifty has had days where returns ranged from +17.7% to -13%. On those extreme days with that same 10,000 investment, you would either gain 1770 or lose 1300. Looking at this, it seems even more tempting to try to time the market. Well, here is a quick illustration. These are the best 3 days and the worst 3 days of the Nifty for the last 15 years. Next to this, we’ve displayed the returns on those days as well as the returns on the following day. While it might seem like a good idea to buy after a bad day in the market or sell after a good day, there really isn’t a pattern that confirms this.
The risk of timing the market is the potential of missing out on the best days. When you miss out on a great market day, you don’t just miss out on that day, you miss the compound return over time. Looking at the Nifty’s last 15 years, if you missed out on the best day, you would have a 15% lower return versus had you just stayed invested in the market. Similarly, if you missed the best 5 days, you would have a 36% lower return. Even worse, if your market timing resulted in you missing the best 10 days, you would have a 53% lower return compared to just staying the course with a buy-and-hold strategy.
*30-year annualized Sensex returns thru December 2021.