What to do when markets are at all time highs?
NIFTY has made all time highs past four month in a row. Fear of missing out (FOMO) is driving a lot of investors into the markets but they are also worried, what if this is “the” high and markets go down and they take some losses. It is not surprising that the two most common questions being asked of us are:
- Should I invest if markets are at all time highs?
- If I have cash in hand should I invest as lump sum or as SIP (over a year or so)?
Here, we look at the past and see if we can glean some insights into the above questions. We will spring a few non-intuitive results so please read on and let us know what you think.
Should I invest if markets are at all time highs?
We look at NIFTY data from 1994 to 2017 and look at 5 year returns if we had invested in months when the market made a new all time high.
There are 237 months in our data set – so roughly 20 years of data, where we have future 5 year returns. Of those 237 months, NIFTY made past all time high in 44 months.
If you had invested in months where NIFTY made all time highs and held your investment for 5 years, you would have on average made 57% over five years. The worst outcome was a loss of 5% over 5 years. The best outcome was a total gain of 142%.
If I have cash in hand, should I invest as lump sum or as an Systematic Transfer Plan (over a year or so)?
A common and intuitive strategy we see being touted is as follows:
Since markets are at highs don’t invest lump sum. Park your money in a liquid fund and then move it through an STP into Equity Mutual Funds. You benefit from cash not sitting idle and from rupee cost averaging of STP.
We test this hypothesis on past data. In each of the 44 months where market made all time highs we invest using two strategies and see which out performs.
Strategy 1: Invest lump sum.
Strategy 2: Park money in a liquid fund (assume 6% after tax returns) and STP (systematic transfer plan) into Equity Mutual Fund over 12 months.
We find that in the past 44 instances when the market made all time highs, Strategy 1 (lump sum) out performed 29 times. That is a win percentage of 66% or 2 out of 3 times. If one had consistently used Strategy 1, one would make 4.2% more on average in the first year vs Strategy 2. Those are pretty decent odds.
The result do not change even when you increase the STP duration to 2 years or 3. In fact, the lump sum out performance increases the longer your STP duration.
- Question popular wisdom as it may not always be backed by data.
- If you have an SIP running don’t stop it if markets are at all time highs. That’s the reason you started investing right, to see new all time highs 🙂
- If you are planning to start an SIP, just do it.
- If you are thinking about investing your bonus, invest lump sum every year.