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The 'Range-Bound' Concept

Like many others, the ‘range-bound market’ idea is also another dubious way of trying to time the markets

In the investment-related queries I get from readers, it's interesting to see how certain 'ideas of the moment' keep appearing and seem to be influencing investment behaviour. A few months ago, one dominant idea was decoupling. Decoupling, as everyone knows, died a horrible death. Another idea that is recurring a great deal nowadays is that of 'range-bound market'. This range idea is preventing investors from taking good investment decisions and inducing them to try and time the stock markets in a way that will eventually be detrimental to them. At this point, long-term investors should definitely be investing in a mainstream, non-exotic mutual fund steadily and regularly instead of worrying about ranges and when the market will exit a range.

What exactly is this range business any way? What makes a market stay inside a range and what makes it break out of one? 'Range' is an idea belongs entirely in the realm of technical analysis. According to technical analysts, a market (or an individual stock) gets range-bound because it has what they call support at the bottom of the range and resistance at the top of the range. Like all of technical analysis, the range concept too boils down to yet another dubious way of trying to time the market. An individual investor's main concern should be to earn decent long-term returns without needing to take calls on the stock market's direction and velocity. Under the circumstances, paying any attention to the current range-boundedness of the indices will just induce you to keep delaying your investment decisions. In effect such an investor will keep waiting for the right time to invest and will find one day that he has ending up either not doing the right thing or doing the wrong thing.

In any case, whether the markets are range-bound or not depends on your time frame. On a three-month time frame, they are range bound. One a one-year time frame, they are in free-fall. On a five-year time frame, they are still pointed up. Take your pick. Or rather, invest in such a way that you don't have to take your pick.

Regardless of the state of the stock markets, a good amount of the money that you are saving for five to seven years more should be put in a two or three equity mutual funds. Index funds or Exchange Traded Funds (ETFs) that track the Nifty or the Sensex are also a good idea. These investments should be done regularly and preferably through an SIP so that one doesn't have to decide about investing every month. In the past, whenever the markets have recovered from a decline, the most attractive gains have come to those investors who keep investing when the market is down. In the long run, investing at the low point of the market will be the best thing you will have done.

There is no doubt that the entire world is in the grip of an economic crisis that may either get worse or get prolonged or even both. Business prospects around the world appear to be bleak. However, stocks already have a fair bit of bleakness priced into them. Sooner or later, things will turn around, and specific parts of the markets will turn around quicker than others. When this will start happening is clearly uncertain. Those who have stopped investing in this mania are not doing the right thing.