Fund managers advice their investors to remain invested in times of high volatility. I am often told that this advice is an act of self-preservation, as selling is bad for their business. And investors are always tempted to ignore this advice and develop their own investment strategies.

It can be tempting during times of stock market uncertainty to delay making new investments, or even consider selling investments and try investing again when values are lower. This is Market Timing. But, don't be mistaken. Market Timing is a knife-edge art. Getting it wrong by just a few days can make a significant impact on performance. In fact, far from minimising investment risk, Market Timing is a high-risk strategy. It sounds fine in theory but seldom works in practice. I will tellyou why.

Just as sharp falls in the stock markets tend to be concentrated in short periods of time, so are the best gains. Because these gains tend to occur just before, or after a market fall and those who try to time investments are highly likely to miss the boat. And guess what? The extra returns you might achieve if you did manage to get it right would not be that great, and certainly not significant enough to compensate for the return you would sacrifice if you got it wrong. One can draw at least three conclusions from the long-term equity trends. First, time has reduced the risk of holding equities. Second, there is no guarantee that you will earn the long-term average return of 18 per cent a year even if you hold stocks for two decades or more, as this is historical return. Third, years like 1990 and 1991_ when the Sensex provided total returns of 33.82 per cent and 91.03 per cent, respectively, _ may already have provided a sizeable chunk of the returns that can reasonably be expected over the nextseveral years.

A deeper analysis of returns from BSE Sensex during the period 1990 - April 1999 also shows that missing just 10 'best gain' days (equivalent to about one day a year) significantly reduced annualised returns from Sensex by two third. Rs 1000 invested in Sensex on January 1, 1990 would have become Rs 4286 as on April 15, 1999, an annualised return of 16.96 per cent. As a market timer, if you would have missed the 10 'best gain' days, your Rs 1000 investment will be worth Rs 1588 only, an annualised return of 5.10 per cent. The loss could be even more for a more broad based Index like S&P CNX 500 or BSE 200. But what if you did get it right every time? Would it actually make that much difference? Again, analysis shows that over a long term - in this case January 1, 1990 to April 15, 1999 - the answer is no. Investing on a `random date' every year during that period would have produced healthy returns between the two extremes.

This proves that despite inevitable stock market volatility,investors will make money in the long term simply by following the advice of a trusted investment manager. Investors who remain continually invested achieve better returns.

Value Research