Market Timing vs SIP Discipline: The Strategy Gap That Costs Investors Lakhs

Market volatility is often followed by a common phenomenon among investors. As markets decline and global events are unpredictable, investors often feel like it is better to wait. The common perception is, “Why should I invest today when markets might decline tomorrow?” This is often followed by investors who feel like waiting is the right strategy. However, what appears to be a wise approach is often nothing more than an excuse to miss an investment opportunity.

In reality, most “smart” investors who choose to wait for the right time to invest often find themselves losing to consistent investors. Systematic Investment Plans, wherein an investor invests a fixed sum at regular intervals, is often an approach to avoid such stress. The numbers behind this approach show how investors who choose to wait for the right time to invest often find themselves losing to those who choose to be consistent.

The Psychology Behind Waiting for the Right Time to Invest The scenario is as follows. Two investors, let’s call them A and B, both wish to invest ₹10,000 every month in the stock markets. One of them is disciplined enough to invest his money every month, regardless of the market conditions. The other, on the other hand, believes that since there is global economic uncertainty and political tensions, he should wait for the right time to invest. Although this approach sounds wise, as he can invest at a relatively lower price, markets are unpredictable. Weeks turn into months as investors wait for the right time to invest.

Eventually, this difference will cost us money.

Waiting for a 10-15% Dip: Does It Really Happen?

The other practice that investors commonly follow is to wait and invest only when the market dips by 10 to 15%. This is based on the idea that an investment made at this time will allow us to make more money over time.

The problem with this approach is that markets do not dip by 10 to 15% just because we want to invest. If markets are volatile during times of high market volatility, it is possible that markets will recover before this correction takes place.

If the markets are likely to make an average return of 12% every year, and we end up not investing for six to twelve months while we wait for this correction to occur, we will end up missing out on a significant amount of growth. For example, an investment of ₹1 lakh will grow to around ₹1.06 lakh to ₹1.12 lakh. On the other hand, an investment that is not made will not grow at all.

But what if the correction occurs and we end up buying the market at a time when the correction has already passed and the markets have gone up? This is a very real risk and will mean that we end up buying the markets at the same or even higher levels than those we chose not to invest in the first place.

The moral of this story is that waiting for a dip in the markets is not a good idea and will mean that we end up missing out on growth if the markets end up going up before the correction occurs.

Missing the Recovery Hurts More Than Missing the Fall

While markets falling is a major cause of worry, markets rising is something that is much less predictable. In fact, some of the highest market growth is seen immediately following a period where the markets have fallen by a large amount.

For example, assume an investor invests ₹10,000 per month through a SIP over a period of 20 years, earning an assumed return of 12% over time. This can translate into an amount of ₹1 crore.

However, if the investor waits for just 12 months in a volatile market, the final corpus would be just around ₹85-90 lakhs. This would be a loss of nearly ₹9-12 lakhs in the form of lost wealth.

What’s more interesting to note here is that the loss in the form of the contribution to the mutual funds would be just ₹1.2 lakhs. However, the rest of the loss would be in the form of the compounding effect, which is the driving factor behind long-term investments.

This brings us to a crucial point to remember, i.e., missing out on the recovery phase has a larger impact on long-term investments.

Investing During Market Falls vs. Waiting for Further Declines

Investors are often wary of investing in the stock market when corrections take place. These corrections happen when there is geopolitical tension or economic uncertainty. However, investors end up waiting and holding off on investments.

What investors forget in such a situation is the fact that the stock market doesn’t move in a linear fashion.

Let’s take a hypothetical situation where the investor has to invest ₹1 lakh in the stock market. However, due to the corrections in the stock market, the value dips by 15%. This would bring the value down to ₹85,000.

However, in the next quarter or the next financial year, the stock market might go up by 20%. This would bring the value up to ₹1.02 lakhs.

In such a situation, the stock market would not only go back to the original position but would also go above the original position. Hence, the investor would end up investing in a stock market situation where the price would be higher than the original price.

The Hidden Cost of Staying Out of the Market

The other cost of staying out of the stock market would be the cost in the form of time. Time is more valuable than timing in the stock market.

For instance, a ₹10,000 monthly SIP over a period of 20 years with a pre-set rate of return of 12% would result in a corpus of around ₹1 crore. However, if the investor delays the start of the SIP by a single year, the corpus would reduce to around ₹86-89 lakhs.

The difference in the corpus amount would be around ₹9-11 lakhs solely because the monthly SIP amount remains the same.

The reason for the difference in the corpus amount lies in the concept of compounding. Compounding refers to the returns generated on the returns. When investors delay entering the markets, they inadvertently reduce the time period over which the returns will be able to generate more returns.

Timing the Market Requires Getting It Right Twice

Investors believe that they will benefit by entering the markets only when the markets are low. However, the fact remains that timing the markets requires investors to get it right twice. They must know the correct time to enter the markets and the correct time to exit the markets.

In markets where the conditions are volatile, such as in the case of the ongoing global conflicts and the economic conditions, it would be extremely difficult to identify the turning points in the markets.

For instance, an investor planning to invest ₹1 lakh in the markets might plan to invest only when the markets correct by 20%. However, the markets might correct by 10%, and the price would fall to ₹90,000. Then, the markets might rise by 15%, and the price would rise to ₹1.03 to ₹1.04 lakhs.

The investor would have lost the opportunity to invest in the markets because the markets had corrected by a larger percentage than the percentage the investor had anticipated. However, the price would now be higher than the original price.

Consistency Often Wins the Long-Term Game

Uncertainties in the market and negative news headlines always force investors to postpone their investments. However, past trends have shown that staying invested has always yielded better results than trying to predict the market.

The idea behind SIPs is to eliminate the need for investors to predict the ‘right time’ for investment. Instead, investors can benefit from the concept of cost averaging and the power of compounding.

Despite the volatility in the market, there are always opportunities for investors who are disciplined and invest in the market without worrying about the prevailing sentiments.

The difference between creating wealth and missing an opportunity might lie in the fact that consistency is key.