Should one really time the markets?

Fri, 30 May Pre-Open

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It is said that ignorance can be bliss sometimes. Today this adage best fits the investors who ignored short term/cyclical blips and stuck to equities in bad times. We do not deny that it was hard to turn a blind eye to various weak macro indicators such as rising current deficit; staggering inflation, depreciating rupee and in general deteriorating health of India Inc. However, the recent surprise bull run in markets has rewarded investors who have been patient and could see beyond the apparent. That said there are many others who either opted for bank fixed deposits or chased the gold rather than staying invested in stocks. One can say without a doubt that many of these investors now have the miserable feeling of missing the bus. They either exited the markets too soon or feel that now its too late to invest. Had these investors been patient, they would have been rewarded.

So where do people go wrong when it come to markets? As per a feature in livemint, investors' lack of patience and over reaction to bad news is what triggers panic selling. Stock market is a place where numerous views float and market experts can have views as different as chalk and cheese. Sometimes too many views can also lead to confusion and make one commit a mistake which could have been avoided through a personal due diligence.

Another mistake that investors make is to have a short term investment horizon. If you have a limited time horizon it is easy to get swayed by short term hiccups in the markets. Sometimes even though a particular stock could be good with strong moat and fundamentals; the cyclical downturn in the sector could impede its growth. In such cases it is best to stay put and wait for the cycle to turn rather than hitting the panic button too soon.

Nevertheless, even if one has missed the surprise rally all is not lost if one stays invested for the long term. Timing the market is not easy and therefore working out entry and exit points could be futile. It is always better to stick to one's investment style or philosophy depending upon your investment objectives and risk appetite. As a long term investor you can hang on irrespective of the market volatility, highs and lows. You can research and invest in the sector which are witnessing a cyclical upturn; stocks which are fundamentally intact despite temporary highs and lows, have good management and boast of a strong business moat.

If you are invested for long term chances are high that you will get to participate in such surprise rallies more often than not. This is better than having to decide to enter the markets when valuations have run ahead of its fundamentals. To add to that it always pays to follow an asset allocation. This way you can always reduce/increase your exposure when market is fundamentally expensive/cheap rather than exiting or being over-invested in the market.

Do you agree with the process of staying away from the noise as a long term investor? How easy or difficult do you find it to do so? Share your views on the Equitymaster Club