some heady gains from the lows of March 2009, the BSE SENSEX has been
in a range bound fashion since September 2009. Investors have seen the
“trapped” between 15500 and 17500 points i.e., in a
trading range of about 13%
per cent over the past three months.
range bound stock market has left some investors on the sidelines
waiting for the next rally
conducted a study of historical returns for the SENSEX between
1980 and 2009 to test the benefits and detriments of timing the market
the ten worst months resulted in an annualised 26% return, versus the
annualised 18.4% return for remaining invested from 1980 to 2009
the ten worst days of performance in twenty nine years,
annualised return improved to 22.4%
the other hand, missing out on the ten best months and ten best days
gave annualised returns of 9.4% and 14.2% respectively
returns were concentrated between -5% and 5% for a majority of the time
results suggest that market timing can be a risky strategy which may
severely impact returns, if one misses out on the best days or months
of market performance
this limited movement in the stock markets since the past few months,
investors may be tempted to sit on the sidelines, waiting for the next upward
investing in the stock market.
the practice of trying to time the market really the best option?
consider the historical data for
the BSE SENSEX to capture the numerous
economic cycles between 1980 and 2009. The purpose is to monitor the
outperformance of an investor who has managed to avoid either daily or
declines in the market.
1 shows the returns obtained by missing the best and worst ten days, as
the best and the worst ten months for the entire period (end of
to end of October 2009).
1: Value of
Rs. 1 invested in the SENSEX since 1980 with different
all negative months
all negative days
Source: Bloomberg, iFAST Compilations
SENSEX during this period has given an annualised 20.09% returns over
the twenty nine year period. Thus, a rupee invested in the SENSEX back
in December 1979 would be worth Rs. 134.53 at the end of October
the study further, we calculated the hypothetical returns if an
managed to avoid all negative months while investing during this entire
nine year period (158 negative months out of the 368 months in the
study). Such an investor would have grown a single rupee into more than
lakhs in twenty nine years.
about an investor who has managed to avoid all the days when the
ended in red while invested during this twenty nine year period? The
net worth of
such an investor would have stood at over Rs. 13 quintillion,
billion multiplied by a billion, an incredibly large figure (a
quintillion is 1018).
To put this figure in perspective, the total estimated global economic
was “just” US$60.6 trillion in 2008, and 13
almost 2.66 lakh
times bigger than the $60.6 trillion.
1:Outliers can make a huge difference!
more realistic expectations
results we have derived so far suggest that the investors who can
time the market (either by month or by each day) may become a
even the richest person in the universe. Obviously, the catch here is
is practically impossible to time the market on a monthly basis with
accuracy over such a long period of time. Needless to say, timing the
with perfect precision on a daily basis over twenty nine years is
art best reserved for the almighty.
2 shows the same study with more realistic scenarios. Four scenarios
tested, which we believe are plausible outcomes for an individual
2: Value of Rs.1 invested in the SENSEX since 1980, with more realistic
top 10 months
top 10 days
worst 10 months
worst 10 days
Source: Bloomberg, iFAST Compilations
the “mines” or “potholes”
the ten worst months has increased the annualised returns from 18.4% to
while avoiding the ten worst days increased the annualised returns to
This is all well and good for an investor, but it certainly calls for
question: how does an investor manage to avoid these
“potholes” in their
missing the best months or days severely impacted performance
unable to forecast the future, we believe that our study of missing out
top ten months or top ten days may have more bearing on determining the
investment approach. In the entire 368 months of study, it is
note that missing out on the best ten of those months nearly halved the
annualised return of the SENSEX. On an absolute return basis, the
return of the SENSEX was cut to just 1,341% as a result, a very paltry
for almost twenty nine years of investment.
out on the best ten days of market performance in the entire eighty-two
period was less detrimental, but cut the annualised return to 14.2%
versus the SENSEX’s
18.4%. On a total return basis, this has translated to a 4,757% return.
are “boring” a large part of the time
shown in Chart 1, the monthly returns of the SENSEX appear to be
distributed, with 68% of the monthly returns in the range of -5% to 5%.
are the periods where markets are considered
often trade in a
range bound fashion. However, we believe that the investors should be
excited about the positive occurrences (those on the right side of
and should ensure that their portfolios benefit when such hefty gains
one is extremely lucky, the only way to ensure exposure to these
periods of performance (just 11.5% of the months under study had a
return of over 10%) is to remain invested in the stock market and avoid
invested is the better option
the results, it appears that while getting market timing calls right
worst performing days or months), one can generate significantly better
performance than the market return. On the other hand, missing out on
days or months will hurt returns substantially.
no one can correctly forecast the direction of the market with precise
accuracy, avoiding the worst periods of performance is not easy, and is
an impossible task. Rather than trying to avoid the large
outliers (shown on the left side of Chart 1), a task fraught with
investors can choose to “accept” all the huge
positive-return occurrences (on
the right portion of Chart 1), a certainty if one stays invested in the
Leading Economic Indicators
to Avoid Losses In a Volatile Market?