Monsoon Highs: Should Investors Embrace All-Time Market Peaks?

Monsoon Highs: Should Investors Embrace All-Time Market Peaks? All-time highs - not so uncommon in a growing economy Time in the Market vs. Timing the Market

Investing in an all-time high market can be scary for many investors. The concerns of overvaluation of stocks and risks of pull backs are high. However, currently, India is expected to be the fastest growing major economy in an otherwise gloomy world, at least for a few years to come, and missing out on the equity opportunity can be costly. This article delves into the factors that investors must consider when navigating these market conditions, shedding light on the wisdom of embracing the market even at peaks and maintaining adequate portfolio allocation towards equities.

All-time highs - not so uncommon in a growing economy

The Indian economy has been witnessing steady growth, with GDP expansion and increased industrial production. FIIs have been significant buyers of Indian Equities in the recent past, indicating greater global belief in the India Growth Story and the willingness to participate in it. The surge in market indices signals the possibility that investors have confidence in the country's economic potential. Strong market sentiment generally encourages capital inflow, which further contributes to growth and development.

Time in the Market vs. Timing the Market

Attempting to time the market perfectly is a difficult and often unreliable strategy.

Consider an investor named Mr Sharp who tries to time the market by waiting for the "perfect" moment. Unfortunately, he ends up waiting too long for the prices to drop, and remains underinvested or keeps his money parked in short term deposits for most of the time. In the calculations below, that cover Indian Equity Markets and short term deposits since the year 2000, Mr Sharp received an average return of 5.6% in 5 years.

His friend, Miss Fortune, ended up investing at the worst possible time every year. One must be really unlucky to emulate Miss Fortune’s performance – because just like picking absolute market bottoms is difficult, picking absolute tops is also very difficult. But still, she made an average 11.1% in 5 years, and earned more than 5% in 90% of time frames. She also ends up making better returns than Mr Sharp in ~70% of 5-year time frames.

Another friend, Miss Disciplined adopts a "time in the market" approach. She invests a fixed amount regularly, regardless of market conditions. Over time, she benefits from the compounding effect of returns and ends up with a more significant portfolio value compared to Mr Sharp. Her average 5-year return stood at 15.2%.

Note: Mr. Sharp’s returns reflect average 90-day FD rates during 5 calendar years. Returns from Ms. Fortune reflect investments made at the peak of each calendar year in Nifty 50 TRI, and 5 year returns hence. Returns of Ms. Disciplined are calculated by computing investments made on 1st January every year and redeemed on 31st December 5 years later.

Source: MFI explorer, Internal calculations

Conclusion:

Investing at peak should not always be perceived as a bad time to invest. Although it may be true that markets experience volatility and corrections in the short term, steadily investing for the long term irrespective of market levels is generally considered a better way to create wealth from equities.

Investors should focus on the power of compounding, maintaining a disciplined approach, and make regular investments in a disciplined manner.

Disclaimer: The information contained in this document is for general purposes only and not an investment advice. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. Readers should seek professional advice before taking any investment related decisions.

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