Should you time your equity investments?

Amid all the talk about economic slowdown, rising inflation and interest rates, Rahul is not sure about what lies ahead for equity markets. While those around him seem to be investing at every market dip, he is keen to quit. Rahul had invested at the last peak and does not want to repeat that mistake. He is convinced that there could be a phase of lower corporate profitability and hence, there is no point in following the crowd. He believes that it is a sensible decision to leave when others are buying. However, there is a nagging doubt: what if those that are buying turn out to be right?

Rahul is one of those investors who think that in order to make money in the equity markets, one should get the timing right. At the time he invested, it looked like nothing could go wrong. Everyone seemed optimistic about India and the equity markets. That the market has peaked is known only after it crashes, at which time it is too late to quit. No one can time the entry and exit right, which is why Rahul should stick to simpler rules for himself. Whether he should invest in equity or not, should be guided by his goals.

If he has long-term goals, which need protection from rising inflation, he needs equity markets and the capital appreciation that they provide. The average return from equity is high, but is not achieved year after year. By quitting at the end of six long years of low returns, Rahul may be missing out on an up cycle that can help average his returns. It is only from staying in a rising market that Rahul can hope to earn a better return in the long run. Therefore, to quit or to stay invested will depend on whether he needs to earn a higher average return for his goals. As for how much to keep and how much to take away, Rahul should stick to an asset allocation plan.

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If his goals require 60% investment in equity, that exposure should be maintained. When he books a profit, he has to find another asset to invest it in. But limiting his exit to this percentage will help him manage his investments better. He will stay through rising and falling markets, and manage to achieve the average return. Rahul should quit only if he has decided that equity markets are not for him. In that case, he should invest more to achieve the same targets, since his returns are likely to be lesser. He might harm his returns if he chooses to quit now, only to come back again after the markets have risen. Investing a proportion of the savings consistently is what will help investors like Rahul, who may not be market experts.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.

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