Standing in 2019, if an individual decides to look back and ponder upon their investments decisions, would they be able to identify where they went wrong?
Would they like to go back and undo a few of them that had cost them because they just couldn’t get the ‘market timing’ right!
Before one accredits any such blames on marketing timing mutual funds or showers the same with praises to bring in enormous gains, they must know –
“Market timing doesn’t work! It’s all in your head!”
Before we discuss why it doesn’t work, let’s start from the basics, i.e. what is it to find out if you too have been a fan of it off-late.
In the simplest of terms, marketing timing is an investment strategy that works on the principle of predictions. It is the exact opposite of the ‘buy-and-hold strategy’.
It can also be said to be an attempt made by investors to cushion the blows of the investment market by predicting its movement. Such predictions are made to sync their sales and purchases accordingly.
Why doesn’t it work?
It is often believed that portfolio managers, traders and seasoned investors are equipped with the knowledge to understand how market works and, therefore, are in a better standing to predict its movements. But that is not true. Not because they lack knowledge or are still raw when it comes to experience.
Their inability to predict the market and time their investments root from a simple fact – the investment market is a volatile place and no one can predict its flow.
For example, let’s assume for the time being that market timing in India, could work, in theory. But in order to ensure that happens, one has to predict a series of happenstances that are ‘unpredictable’. So, if an investor did succeed at it, it would be a matter of sheer luck or pure coincidence.
But would one really feel comfortable to leave the fate of their hard-earned money entirely on their luck?
Many reputable sources, including the Journal of Financial Research and Financial Analyst Journal and their studies, have rejected the effectiveness of market timing entirely. The critics have further added that it is impossible to time the market effectively.
Peter Lynch, an American investor and mutual fund manager, stated, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves.”
What a better option?
Instead of relying heavily on the assumed boon of market timing, investors should focus their energy on building an investment strategy that is effective and feasible in every sense.
A sound investment strategy comes handy in many ways. It doesn’t just allow people to maintain their finances and investments better. It also helps them to enhance their scope of earnings and strengthening their risk appetite by enabling them to build a strong and diverse portfolio.
Mutual fund investors can practice these full-proof investment strategies instead –
- Start investing from an early as
Individuals who start their investment venture from an early age, familiarise with the terms of the market better. It allows them to practice patience and develop long-term strategies that prove effective in meeting their long-term goals. It directly helps to reduce their dependence on the need to time the market and allows them to inculcate healthy investment habits.
- Adopt a financial management plan
Developing a sound financial plan should be given due priority while formulating effective investment strategies. A financial management plan will equip investors like you to manage their cash better. It will also help them when it comes to diversifying their portfolio better. It will further help them enhance their skills when it comes to cash-flow management and will help them meet their financial goals comfortably. When an investor has a financial plan to stick to, reliance on timing to make investments work disappears.
- Adopt a systematic way of investing
Investors should adopt a systematic investment strategy. They should opt for such investment plans that don’t get much bothered by the ups and downs of the market and can be easily continued for a long time.
For example, an investor can invest in a long-term SIP scheme that comes with a nominal principal amount. Such an investment option requires regular investments, which directly eliminates the need for market timing. It also allows investors to derive profit even in the low market phase through its feature of rupee cost averaging and the power of compounding in the long run.
- Diversify your investment portfolio
The need to time the market roots from the fear of incurring a loss in case of volatility. Investors can eliminate such fears by diversifying their collection with a balanced mix of assets and funds that –
- Yield higher returns.
- Has a less risk burden.
- Build goal-oriented corpus
Investments act as a potent tool for creating a goal-oriented corpus. Investors should invest in schemes and funds that tend to facilitate them to build a corpus and help them meet their specific financial goals comfortably. Opting for goal-oriented investments will help investors to direct their focus towards crucial financial requirements, making them less concerned about the need for timing the market for every investment decision.
For example, individuals who are soon to retire may develop strategies that help them to build a robust retirement corpus. They may opt to invest in such funds that make their investment portfolio retirement friendly for the long-term.
By diversifying their portfolio, investors will be able to even out their investment-related risks and maximise profits as well without the need for timing the market.
Lastly, it can be said that the notion that market timing mutual funds investment is not effective and may even incur a substantial loss.
It being said, one must give up on it altogether if they want to develop a healthy outlook towards investments. Because like Peter Lynch said, “I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”