The last week has been pretty hectic for me, especially given the numerous telephone calls I’ve received from friends and relatives asking me whether now is the right time to invest in stock markets.
“You see, the Sensex has fallen by almost 25% since its highs in November 2010, and stocks look cheap,” argued a cousin.
Most investors I encounter during such periods of market volatility ask me this very question.
Even you might have this very question at the top of your mind now – “Is it the right time to invest in stock markets?”
If yes, here is a study I’ve done that will answer your question (whether it is the ‘right’ time to invest in stocks), and hopefully to the best of your satisfaction.
The results of this study have been amazing, and very close to what I’ve been suggesting people to do all these years.
Let’s get started right here.
Story of four investors and their investing styles
Here is my research on the performance of four long-term investors following very different investment styles.
Each invested Rs 1,000 per month starting December 2001 and till September 2011, and left whatever they invested in the market. Check out how they fared:
Mr. Smart has been a perfect market timer. With incredible skill (or luck), he was able to place his Rs 1,000 into the market at the lowest level of the Sensex every month.
Mr. Dumb has had incredibly poor timing – or perhaps terribly bad luck. He invested his Rs 1,000 each month at the Sensex’s highest level during that month.
Mr. Sensible took a simple, consistent approach. On the first trading day of each month, he invested Rs 1,000 without bothering what the markets were doing.
Mr. Fearful has played it safe and has invested Rs 1,000 every month in fixed deposits. For simplicity’s sake, I have assumed that these deposits have yielded him 8% interest every year, which in itself is a high –enough assumption.
Now look at how each of these fared over this 10-year period…
Note: Ending Wealth is calculated over a period of 118 months, starting December 2001 and ending September 2011. So the total amount invested by all these four investors was Rs 118,000.
The results are in: Investing sensibly paid off
For the winner, look at the graph, which shows how much wealth each of the four investors had accumulated at the end of roughly 10 years.
Naturally, the best results belonged to Mr. Smart, who waited and timed his annual investment perfectly. His total investment of Rs 118,000 stood at Rs 271,867 at the end of our calculation period (September 2011). But he was unbelievably lucky to have invested at the lowest level of the Sensex month after month. You don’t get so much luck in investing anyways!
Anyways, even if you are as unlucky as Mr. Dumb, you will not fare that bad. This is given that even after investing at the highest point of the Sensex every month, Mr. Dumb’s returns were lower by just around 10% as compared to Mr. Smart’s ‘lucky’ returns!
But the study’s most stunning findings concern Mr. Sensible, who came in second with Rs 262,100, or only 4% less than Mr. Smart. This relatively small difference is especially surprising considering that Mr. Sensible had been extremely disciplined in putting his money to work at the start of every month – without any pretense of market timing.
The worst performance however came from Mr. Fearful, who kept waiting for a better opportunity to buy stocks – and then didn’t buy at all!
He fared worst of all, with only Rs 179,741 to show for his wealth after a long 10-year period. His biggest worry had been investing at a market high.
Ironically, had he done that each year, he would have still earned almost 36% more than what his ‘safe’ investments earned him.
You got my point, right?
See, it doesn’t pay to look for the ‘best time to invest’ unless you have this divine knowledge that you are going to be very lucky with your investments.
The best course of action for most of us – as it comes out from the above results – is to create an appropriate plan and take action on that plan as soon as possible.
It’s nearly impossible to accurately identify market bottoms on a regular basis. So, realistically, the best action that a long-term investor can take, based on the above study, is to invest in a systematic, disciplined way, regardless of the level of the stock market.
Of course, the stocks or mutual funds you buy must be of good quality that aren’t expected to destroy your capital.
Anyways, another interesting result of the above study is that, in the long term, even badly timed stock market investments are much better than no stock market investments at all.
So if you ask me – “Is this the right time to invest in stock markets?” my answer would be, “Yes, but stay disciplined.”
Don’t look for the perfect moment to get started.
Start investing now, and build upon it month by month.