While getting the market timing right can yield great returns, how many of us can get that right consistently? Market’s greatest returns and declines are concentrated in very short periods. Missing a single month, week or even a day of good returns can have a very adverse effect on portfolio returns. That’s why a simple Buy-and-hold strategy is the best approach for most investors.
When the market commentary is adverse, you have this strong urge to sell your equity investments and buy back when the markets have stabilized. Unless you are a smart (and rational, not emotional) trader or a very lucky investor, acting on such urges will be counterproductive over the long term.
Why?
Due to the nature of market returns.
Equity markets don’t provide fixed deposit like returns, where returns are evenly spread over time. Market returns/declines tend to be concentrated over short intervals. Therefore, while trying to time the markets, if you miss those good days or weeks, your long-term portfolio returns are severely affected
If you are very unlucky and miss such days/weeks/months consistently, your portfolio is doomed.
Performance Comparison: Buy-and-hold Nifty 50 TRI vs. Missing Best Days/Weeks/Months
I consider Nifty 50 TRI data from January 2000 until March 31, 2022. A period of over 22 years.
I compare the performance of Buy-and-hold Nifty 50 TRI against the portfolio that misses
- The Best day of the year
- The Best week of the year (Monday to Friday)
- The Best month of the year (calendar month)
If you miss the best day of the year (just one day) consistently from 2000 until 2021, you end up with just 1/3rd the value of Buy-and-hold portfolio after 22 years.
You lose 72% of the returns by missing just 22 days. While you must be really unfortunate to experience such a thing, it does show you the impact.
Buy-and-hold Nifty 50 CAGR: 13.3% p.a.
Best-day-missed Nifty 50 CAGR: 7.6% p.a.
What if you are the luckiest person on the planet and tend to avoid the worst day of the year, you will end up with Rs 5,598. CAGR of 19.83% p.a.
The contrast gets worse from here.
The portfolio with the Best-week-missed every year grows to only Rs 315. CAGR of 5.3% p.a.
Buy-and-hold portfolio CAGR: 13.3% p.a.
You lose 85% of the returns by missing out the best 22 weeks during the past 22 years.
If you are fortunate enough to avoid the worst week every year, you end up with Rs 9,470. CAGR of 22.7% p.a.
Best-month-missed portfolio grows to only Rs 155. CAGR of 2% p.a.
Buy-and-hold portfolio CAGR: 13.3% p.a.
You lose 96% of the returns by missing out the best 22 months during the past 22 years.
If you avoid the worst month every year, you end up with Rs 15,511. CAGR of 25.4% p.a.
Avoiding the worst day/week/year has super-charged the returns. However, trying to avoid the worst week is also market-timing and is as difficult.
In the table below, I list down the returns in the best and worst day/week/month of for each year.
As you can see, the market returns are concentrated in short periods. By trying to time the market, you risk missing those periods.
For the years where the market returns are less than 15% (11 years in total), the best weekly return accounts for more than half the yearly return in all such years.
What should you do?
It is not that you can’t time the market. I discussed one such strategy based on 100-day and 200-day moving averages in an earlier post. The results were decent. And this was a very basic strategy. I am sure there are very smart traders who get such calls right more often. However, most of us are neither so good, nor so rational.
Moreover, the problem with investment decisions is that you never have an unequivocal winner. Nothing works all the time. There is no guarantee. And when things don’t go your way (even in the short term), there is mental dissonance and confusion. You might jump the ship at the wrong time.
Remember, when you make investment choices, you just don’t have to deal with market movements. You must deal with deal with your emotions too. And it’s not easy. Buy-and-hold reduces the number of decisions you make, which makes sticking to the investment discipline easier.
I do not mean that you must not ever sell your investments. Asset allocation and portfolio rebalancing are two bedrocks of portfolio construction. And portfolio rebalancing requires selling. But it is a rule-based selling and not gut based (or market commentary) driven selling.
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