Updated on: June 23, 2020 ; Wealth & Value
How important is “Time”?
Timing plays a very crucial role in the success of any investment. What it essentially means is that the time when you put in your money and the time when you take it out is very critical. In an ideal world, for the best possible gains, you should put in your money when the asset value is low, and take it out when the asset value has peaked.
Unfortunately, you would only know what these entry and exit times are, once you have gone well past them. No one can predict the exact peaks and bottoms in the future. The most you can do is, only make some educated guess by doing a whole bunch of analysis. To realize, at the end that, no one has been able to predict the markets accurately and consistently. No one can time the market.
The other aspect of time is the longevity of your investments which is also very crucial. This has been discussed in the article on compounding.
Do you think you are late?
If you look at the past performance of some prospective investments where the asset value had gone up significantly, you might feel that you have missed the opportunity. You might get the feeling that you were late this time again. This is a common feeling that many investors share.
But don’t worry, there will always be more opportunities in the future if you are alert enough to grab them. You will need to use your knowledge and discipline to identify them first. The only problem is that you will not know when the opportunity will materialize. So, don’t ever try to time it, just be there much before the moment arrives.
Let’s look at an example to explain this better. Below is the price movement of the share price of TCS (Tata Consultancy Services) over ten years. We will take a close look at how the asset-value changed over time, and what were the points of opportunity.
TCS is a fundamentally strong and robust company. They are the market leaders in the IT services industry and have a long-standing history. If you were invested in the stock from the beginning of 2010 till 2020, you would have earned an impressive growth of 5.6 times. This means a strong CAGR of 18.8% in 10 years. Also, notice that the growth path has not been smooth. There were patches of decline and flatness in these ten years.
Let’s look at some scenarios within these ten years. During the span from mid of 2014 till the beginning of 2018, there was hardly any price movement. If you were to enter and exit within this period of 3.5 years, either you would have made no gains or incurred a loss.
Something interesting happens just after that. The price zooms from 1,322.80 in January 2018 to 2,183.70 in September 2018. That is a 65% appreciation in price within 10 months. An astounding CAGR of 82%!
After this period, there we don’t see any significant price movement. The price has been range-bound for most of the time-period except for the sharp decline in March-April 2020. I doubt you would find any good stock that escaped this kind of fall, thanks to Covid-19. But the stock recovers soon after that and seems to have regained its previous levels. We don’t know in which direction will the price be moving after this. The price may fall or hang in there for some more time. Or will it break into another rally? So at every point in time, there is an element of uncertainty associated with the price. It is hard to predict what will happen next.
By looking at the graph, can you identify the ideal entry and exit points? Following are two examples of good entry and exit points
- June 2013 – July 2014
- Jan 2018 – Sep 2018
I have deliberately not given the specific dates here. But you get the idea, right? There are more entry and exit opportunities in there. You can try to find them yourself as an exercise. But I would suggest that you don’t spend too much time on it. The question now is, could you have predicted these points of entry and exit?
No one can ever predict these points precisely. Anyone can look at the past and give his expert opinion, but that doesn’t help. What you can do is to research and identify good quality investment options. Read the article on Investment – basic elements. Once you have identified these opportunities, the next step is to check which of these opportunities has a promising valuation. That is if there is a high potential for any upside price movement. Start investing in such opportunities as soon as possible.
You can never determine the exact start time and duration of the price appreciation. So you have to be there before it starts. Like in the case of TCS, people who showed patience, and confidence throughout the period of 2014 till 2019 and held on to TCS, finally got the results.
What should be my timing strategy?
Photo by Anastasia Petrova on Unsplash
In case I was not clear earlier, I will say it explicitly now – “Don’t try to time the market“. No one has been consistently successful at it. Don’t be speculative with your investments ever. First and foremost, understand the investment avenues that you feel are rightly prices, that have a potential upside in the future, and also have a solid foundation.
Start investing if the price is right. Don’t wait for the perfect price or time. Since you can’t time the market, you should distribute the risk of uncertainty by investing small sums of money at regular intervals. You need to take account of a lot of other factors as well. To know more, read Investment – basic elements.
You may decide to go for Systematic Investment Plans (SIPs) in mutual funds of your liking. Another option is to park your funds in any short term, low-risk vehicles like liquid funds till you find the right opportunity. There are limitless possibilities for you to choose from. Do your due diligence before making the choice.
Be very careful, to not enter the market when there is a bubble-like situation. It can be difficult for someone to know when they are sitting on one. Use your judgment to analyze the information around you with a clear head. Try to cut out the noise and the expert opinions around you. Look at the facts objectively. If something doesn’t seem right, then probably it is not right.
One sign of a bubble or peak is when you start getting investment advice and opinions from people you least expected from. So keep a lookout for such indications.
What is the right time to exit?
Enough of talking, on when to start. You must have got the main underlying theme now. But what about the time to exit? Is there a right time when you should exit? Well, to answer that, we will have to go back to the objectives of your investments. There can be many exit strategies based on your goals. All of that will depend on your fund value, circumstances, and needs. You can choose to exit once you have grown your corpus enough so that they meet your objectives. You may also choose to stay invested for longer, even after your financial goals are achieved if there is no immediate need for funds.
Remember to keep monitoring the health of your investments. If you see that the underlying fundamentals of your investments have changed. The growth potential that you had assumed earlier doesn’t seem realistic, then it is time to consider a switch or exit.
Conclusion
No one can time the market. It is the length of time for which you stay invested that matters the most. Find the right investment instrument, determine if there is a potential of growth, and start investing. Don’t worry about getting the timing perfect because no one can. If it is a quality investment, then the asset value will appreciate when it has to. No one has either control or prior knowledge of it.
Focus on the “Right” time and happy investing!!!