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In my last two articles we have looked at the Risk / Return of the Indian Stock Markets and have made the case for bank deposits. The question remains is investing in this stock market worth it? Can market timing help? Research by Fidelity UK tends to indicate timing does not work (at least for UK markets). Let’s find out if it can for Indian Markets.

I have data from Jan 1, 1991 to March 9, 2007. This has 3622 1-year rolling periods (i.e. Jan 1, 1991 – Dec 31, 1991; Jan 2, 1991 – Jan 1, 1992 and so on). Of these 3622 1-year periods you would have made lost money 40% of the times and made money 60% of the times. The results, along with other periods, are:

india 1

Therefore, for 10-year period there was just a 5 % chance that the returns would have been negative. The average returns would have been 6.72%.

So, by market timing can you increase your returns? Let’s say you invest a fixed amount every year. Consider these 3 scenarios; you invest at random (say on Jan-1 of every year), you invest at absolute high for that year and finally you invest at absolute low for the year. This will indicate whether timing the market has any impact on your investments.

First for the entire data:

India 2

grown to 3 times its value, at random it would have grown to 1.5 times to approx 4.5 times and at market highs it would grown to almost double to 5 times. Importantly, there would not have been a huge difference between investing at market lows and at random.

However, this does not tell us about what happens for shorter durations and during bear markets (and for that matter bull markets). The results for 3, 5, 10 & 15-year periods for year’s ending in 2000 to 2006 are tabulated.

India 3

India 4

As the investment period increases impact of market timing decreases. There is not much difference between investing at random and absolute low for 10 & 15-year period. Moreover, for shorter periods investing at random is still a good option. Since you never know when the market is at absolute low, therefore, for long term, one should not worry about timing the markets.

Let’s conclude what we have learned in this and previous 2 articles:

  • Average returns for the 10-year period have been 6.67% with standard deviation of 6.66% implying 95% of the returns lie between -2.76% and 16.08%
  • 95% of the times you would not have lost any money over the last 10-year period. 5% of the times 10-year investment would have yielded negative returns.
  • The worst return for a 10-year period is -2.80%
  • M3 growth still remains high and as inflation generally lags M3 by one year; it is likely that inflation and hence interest rates will go up.
  • Currently certain banks are offering deposit rates up to 9.5%, which is higher than historical 10-year stock returns. Risk less.
  • Market timing seems to have little impact on 10-year period. Therefore, stick to a strategy of investing on Jan-1 for long term.
  • Source: Investing in India: Can Market Timing Help?