First of all see what the people use to say “It is more important Time in Market than Timing the Market”.
No doubt that Time in the Market is necessary to grow your fund but there are some limitations. For eating the ripe fruits of Time in the Market we also need to do Timing the Market. First see why you are earning in long-duration by not doing anything.
Inflation and Economy of the country is always growing in more or less speed so the value of your investments will also grow according to the growth of the economy and inflation. A simple formula for expected returns of equity is GDP+INFLATION. But there is some problem arise when market getting corrected and recovered the growth of your Investment will not be satisfied till Market recovered to its original level. If the entire cycle of downfall and recovery takes a longer period your investment’s growth may get affected. Refer to the following table to understand how the downfalls affect your Investment returns. Longer the period with reduced returns will reduce your final returns
How Downfall Reduce your Returns
In the above table suppose the returns of your investments are 15% in the last 10 years then downfall starts like 2000 and recovered during this period only 1.15% is generated in 4 years. The returns will be reduced to 11.03%. If you are doing Financial Planning, your plan may get burst due to this fall. Now see one more situation of the market what would happen in such Market trend If you go through the above chart of FTSE 100 and study it properly from 2000 to 2015 Market dropped more than half and achieve peak again twice. Now if anybody started his invested for having log term view of 15 years in 2000 what would be the portfolio outcome if only Buy and Hold theory adopted. The client might get his invested amount only or might be even lesser amount also.
Now, what is the solution to this?
In the above first example of why the returns are reduced to 1.15% during downfall cycle? Just because you have ignored the risk of the Market by just following “Time in the Market” One of the biggest misunderstanding on Timing the Market is that one should book the profit at the exact top and deploy the funds at the extreme bottom of the Market which is next to impossible. Then how to make portfolio safer. We can see in the following table that how long term SIP which was generating 11.55% return turned negative -4.47% (loss of ₹4,77,417 in valuation from peak) in just 2 months due to Market Fall in typical SIP which is not doing any Risk Management, another column which runs in SIP with Risk Management generated returns of 11.32% ended with 9.2% (losses are restricted to only ₹24,278/- in valuation from peak). We can see how it is necessary to adopt The Risk Management Strategy to protect invested money from the disruption in the market. By using Risk Management we have saved almost ₹4,50,000/- from erosion in valuations.
From the above Table is proved that only Time in The Market is not sufficient Timing The Market is also required for being survived.
Do Risk Management. When the Market becomes riskier. This is one kind of Timing the Market. For becoming successful investor one need to Time the Market along with the Time in the Market. For Risk Management always keep two things in mind. “Keep watch on Market Valuations rather than Market Indices.“,“Never Seek for the Peak / Bottom in the Market”Final Outcome Without doing “Timing the Market”,“Time in the Market” can not generate optimum returns and achieve safety of the investment. While writing this blog one more thought comes to mind that We are talking much more about “The Power Of Compounding in Mutual Fund Portfolio” while our Marketing Speeches but when it comes to result we all become dissatisfied because Mr. Market is not in our control.
In the coming blog, we are going to discuss “Why The Power Of Compounding didn’t work in MF? Reason and Remedy”
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