Sunday, 7 June, 2009

The importance of Timing the Market

The importance of Timing the Market

You'll often observe self-proclaimed experts talking about the importance of time in the market being more critical for wealth-building than timing the market.

On many occasions, you'd have seen figures bandied by mutual fund folks about how much your returns will reduce if you miss out the best "n" days in the market each year.

They're all stating the truth, but only the partial truth.

It is equally important to ensure that you keep booking profits from time to time.

The very same fund managers hardly ever talk about what happens if you miss the worst "n" days in the market each year. I've always known intuitively that it is likely to have quite a significant impact on our wealth-building process.

I've been looking for readily available information that's India-specific. Thus far I've not located anything meaningful.

However, I've just located this interesting piece of info from the US markets (covering the period from 1966 to 2000):

Am quite sure that the figures will not be too different for Indian markets.

Just goes to show the importance of:

  • Periodically booking profits, especially in over-valued scrips / mutual funds when the markets are overheated and quoting at crazy PE ratios

  • Choosing the dividend payout option in mutual funds

  • And keep investing the surplus generated from the above two steps in cash-equivalents to be converted into shares / mutual fund units when the appropriate opportunity arises.



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