Equity markets have touched new highs in the past one month. On August 1, 2017, as many as 155 out of the 209 diversified equity funds that exist are at their all-time highs, and a further 42 are within 1 per cent of it. That adds up to 95 per cent of the total. In fact, there are only six funds that are more than 5 per cent away from their highs.
All investors who have invested in equity-based funds should be sitting pretty right now, with their investments at all-time highs. However, it turns out that there's a substantial minority of investors who are not in this happy state. Based on my observations, these tend to be the investors who are more knowledgeable and manage their investments more actively. This kind of investor is at the high-water mark of the invested sum but is often sitting on large amounts of cash funds that are uninvested or are recently redeemed.
The reason? They are waiting for a 'dip' in the market before investing. They feel (or, more likely, have been advised) that the markets are overvalued and are ripe for a fall and therefore they must wait for an opportunity to enter. Are these people correct? Well, if they were stock punters who invest for a period of days or weeks, then this behaviour may be passable. However, for anyone who is a real investor and is invested in equity funds for many years (as one should be), this kind of behaviour is self-destructive.
Markets can be high and keep going higher for months or years. You could keep waiting for a long time for that 'dip' to come and actually end up keeping your money in a savings account during the best time. The inherent volatility of equity means that gains, as well as losses are concentrated over very short periods. To demonstrate this, I did a simple study on the Sensex over the last twenty years, from August 1997 till now. Over this period, the Sensex rose from 4,347 points to 32,575 points. However, if you had stayed out of the market during just the three months (out of 240) with the sharpest rise, then that would be like the Sensex rising only to 18,477 points! Conversely, if you had somehow managed to stay out of the markets for the worst three months, then that would be like having the Sensex at 65,798 today.
This shows that most of the gains and losses are concentrated over a fairly small period. Somehow, if you stay out of the market for the periods when it is rising sharply, then your returns will be affected very badly. Now, in the light of this data, think about the behaviour of those who are 'waiting for the dip'. They are deliberately staying out of the market when it is rising. There is no surer way of damaging your returns than this. It gets even worse. These people will invest when it starts falling! So they will not be invested when gains are accruing but will invest when markets are dropping. If there is any kind of behaviour that is guaranteed to create losses, then this is it.
Why do people do this? Simple answer: bad advice and a utterly mistaken mental model of how returns are created in investing. Sometimes, people try some market timing and it works a little bit by sheer coincidence. They start repeating it, not realising that they have no way of actually getting their timing right. One needs to be invested all the time to realise the true potential of one's investments.
Also, do not make the mistake of investing all at one go, in a lump sum. That could make matters worse. Start SIPs and reinvest that money in over about a year. And then stay invested till you need the money.
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