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The best & the worst time to invest in the markets

Jan 6, 2010

The best & the worst time to invest in the markets You may have often seen calculations of what different asset classes have yielded over different periods of time. A hot favorite in this kind of an exercise is stocks. For example, 'Stocks have returned 300% over the last 5 years!', or calculations of similar kinds are commonly chalked up. Such exclamations, both positive and negative, often make it to the headlines of business dailies too. But there's one big problem about these kinds of superficial remarks. They serve to make investors happy or sad about stocks (as an asset class for investment) at exactly the wrong time.

The following table should make things clearer:

From To Sensex level Returns
28-Oct-98 11-Feb-00 5,934 115%
11-Feb-00 31-Mar-03 3,049 -49%
31-Mar-03 10-May-06 12,612 314%
10-May-06 14-Jun-06 8,929 -29%
14-Jun-06 8-Jan-08 20,873 134%
8-Jan-08 9-Mar-09 8,160 -61%
9-Mar-09 5-Jan-10 17,686 117%

At a particular point of time, if stocks have performed badly when looked at historically, they do not stack up well when compared to other asset classes. At that time, especially when returns are negative, they can make even the returns of a simple bank fixed deposit look good. At least the FD doesn't lose any money, right? Makes you feel like simply getting out of the 'risky' asset class of stocks and getting into something more safe and secure.

The opposite is also true. There are times when the returns from stocks look simply fabulous. All other asset classes look pale in comparison. Those are the times when the great returns given by stocks make you feel like liquidating all your other assets and pouring all those funds into stocks. You are not alone if in times like those you find yourself regretting why you did not invest all your money in stocks. After all, who wouldn't want to double, triple or even quadruple one's networth as soon as possible?

But the table above shows why both those reactions would be the worst possible ones you could have. 31st March 2003, 14th June 2006 and 9th March 2009 were some of the days during the last decade when you would found yourself feeling sorry to have invested in the stock market at all. 11th February 2000, 10th May 2006 and 8th January 2008 would have been some days where you would have been the happiest about stocks. Those are kind of times when you feel like pouring all the money you have into stocks.

But the stock market can be the nemesis of investors who invest according to such impulsive and instinctive reactions. As the table shows, if you had invested in the markets when historical returns from the markets were looking terrible, you would have made some mind boggling returns in the coming months. Similarly, when historical returns from the markets were at their most attractive, those were the times when you should have been looking at the exits most frantically.

So the next time you find yourself most pleased with the performance of your stock portfolio, keep in mind that that is probably a pointer that you should be exiting. However, if you still find yourself holding on to your stocks or buying more in expectation that markets will go still higher, be aware that you are falling victim to a very old game that the stockmarket plays with all investors.


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4 Responses to "The best & the worst time to invest in the markets"

Prasad Paranjape

Jan 13, 2010

Nice article. However if I corelate with other article of Equitymaster, " The sensex to Gold Ratio" it is exactly predicting opposite for current year. Do we pay Equitymaster to have contra view

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mervynsequeira

Jan 13, 2010

should we invest now if so till the index is at what range when should we get out of the market please reply i am a member of value pro and hidden treasuresthank you

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Vipin Doshi

Jan 13, 2010

can you suggest ways to find the right time to invest?

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Vipin Doshi

Jan 13, 2010

You are very true. By continuing to invest in January 2008, I have lost to some extent. But i realised that market is falling in May 2008 and disposed off most stocks. Interesting I kept few thinking they are good. To-day these are still at lower levels and the ones that were disposed off are actualy doing better after going down. The mistake I did not cover them when they were at a low thinking they have to go down further.

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