Market timing is a fool's errand

Like how uncles dish out truisms as wisdom at family gatherings, allow us to share one, too: timing the market is a risky tactic. But here's the interesting bit: it's even more true for seasoned investors.

For starters, market corrections are infrequent. It gives investors limited rare opportunities to meaningfully buy the dip. For instance, a single-day 5 per cent fall has only happened 22 times in the last 22 years. Discount the Global Financial Crisis (GFC) and Covid crashes and you will realise that it happens once every 4 to 5 years. Similarly, a 10 per cent fall in a week has occurred just five times in 22 years, or 32 times if you include GFC and Covid.

Suggested watch: Should you wait to buy the dip?

Timing failure

Now, let's assume a monthly Rs 10,000 SIP for 20 years grows at 12 per cent. If you invest an additional Rs 10,000 every time the market falls 5 per cent in a day, the rate of return would barely increase to 12.02 per cent, assuming you get the chance once in a year. That's right, the difference of buying the dip is a wafer-thin 0.02 per cent.

Why's that the case? After five years, the additional money you are injecting is barely 2 per cent of the money you have already invested. The percentage becomes even smaller if you have amassed a larger corpus. For example, a Rs 10,000 additional investment is a drop in the ocean if your wealth exceeds Rs 1 crore.

But what if you had a substantial amount to invest each time the market corrected? In that case, you'd face significant opportunity costs. Because deep market falls are rare. The last time the Sensex (a stand-in for India's equity market) shed more than 5 per cent in a day was on June 4, 2024. Before that, it was May 4, 2020. In that time, Sensex surged 141 per cent. That is the returns you would have missed out on if you waited for a market correction.

Prior to the Covid crash in 2020, such deep intraday corrections happened in 2015 and 2009. That's a span of five and six years you'd be sitting on cash waiting for a crash. Meanwhile, the market continued to make new highs.

Beyond opportunity cost, waiting for market corrections jeopardises long-term goals like children's education or retirement. Not investing or investing less for years can prevent you from accumulating the necessary corpus.

Moral of the story: timing the market is tricky and largely fruitless. It is exactly why SIPs (Systematic Investment Plans) are designed for mutual fund investors. With SIPs , you buy less units when the market goes up and more units when it goes down, averaging your cost and helping you accumulate wealth systematically.

Also read: The power of compounding