Should I wait for a downturn to invest?

The best time to invest is now. As we have said earlier, invest frequently and with discipline. A SIP helps achieve this objective.

Even though investing when stock market is down seems like sage advice it is hard to practice for two reasons. Predicting downturns is hard, and having the stomach to invest when the markets are down and everyone is scared is even harder.

Rani is getting a haircut at a salon. Interested in spreading the power of compounding to everyone, she asks her hairdresser Sam if he invests. Sam says he does, but he is waiting for a downturn like 2008 to put his money to work.

Rani is a big believer in investing every month (SIP), so she is a bit perplexed. She asks us if we can look into the data to see if it helps to wait.

We go back to Nifty all the way back to Aug 1990. We assume Sam had the perfect foresight to time the market for the tech bubble (2000) and the subprime crisis (2008). So he put all of his money into the market during those market lows, else he just waited and kept his money in the bank earning 6% interest.

Of course, the above is a very un-likely scenario for two reasons:

  1. It is very hard to predict market bottoms.
  2. At market lows, when everyone is predicting the end of the financial world, it is even harder to invest your money.

Still, let us grant Sam the ability to time the market bottom and the fortitude and foresight to invest at that time. It’s Rani (2,500/ month SIP) vs Sam (invest only at market lows), who comes out ahead?

In the long term SIP beats trying to predict market bottoms

That’s close you might say. Not really!

Rani is running a disciplined effort via a SIP, while Sam’s returns depends on him timing the two worst drawdowns in recent history to the month. The competition was skewed heavily for Sam to win, but he still ended up doing slightly worse than Rani. Over the past 25years he had two days to invest on and if he missed that he wouldn’t get the returns above. For a simple example, if Sam is only 6months late in timing the market bottom (i.e market bottomed on Nov 2008 but he invested in May 2009), his total wealth would be 36lacs vs 44lacs above. That’s a 20% swing by just missing the market bottom by 6 months.

It’s all good in theory, but what does it mean in practice:

  1. Don’t wait for a market downturn. Over the past 25 years there have been only 2 big ones and it is very hard to identify and buy at the market bottom.
  2. If you invest regularly via a SIP, don’t stop because the market is falling. Invest rain or shine. In the end, discipline is your strength and your best friend.
  3. Financial TV and press create a sense of urgency by highlighting and magnifying every move of the stock market. Unless you are a full time day trader, stay put for the long term.

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