Many a times, it may happen that we want to invest in the equity market but miss the bus. We will certainly blame our stars if the market enters a bull run after that. This usually happens because most investors typically have a ‘follow the crowd’ attitude. The below chart is a good reflection on how most of us behave while taking the equity plunge.

But why can’t we learn from our mistakes and stop following the herd. Is there a more controlled and level-headed way of investing in the market and benefiting from it instead of trying to get the timing right? Before we get to the answer, let us look at a case study wherein we ascertain the loss suffered by an investor who misses some of the best performing days in the market while trying to get the timing right. For example, over a 30-year period, the best single day performance of the Sensex was on 18 May 2009 when the index was up by 17.34%. However, most investors may have stayed away from the bear market as the index was down by over 60% from 8 January 2008 to 9 March 2009 (Sensex value moved from 20873 to 8160). This fright of losing more money usually sees investors staying away on such occasions till they see a secular bull run. This case study tries to explain the notional loss one could face over the long run by staying away even on a few of these best performing days.

Table 1 analyses how returns from the Sensex reduce exponentially by missing the best performing days in the market ranging from the best 5 to the best 30 days. So over a 30-year horizon, one can earn 13.48% annualised returns by continuously staying invested. However, if one misses these 5 best performing days, the returns drop to 11.27% and further drop to 5.10% if one misses the best 30 days. The best 5 days in last 30 years are as shown below. In fact, over a 20-year horizon, the annualised returns drop from 10.27% to 0.30% if one misses the best 30 days. Over a 10-year period, one would get negative 3% annualised returns by missing the best 20 days.

Table for illustration purpose only;  Returns are annualised for period ended June 30, 2016
Source for Sensex values – CRISIL Mutual Fund Research Tool, calculations based on internal research

Now let us see the notional loss over these periods if one invested Rs.1 lakh in the Sensex till June 30, 2016. Table 2 indicates the amount accumulated after 10, 20, 30 years based on the above returns while Table 3 indicates the notional loss if one misses the best days in the market vis-à-vis staying fully invested. Thus, if one made Rs.44.42 lakh (13.48% annualised returns) by investing Rs.1 lakh in the Sensex 30 years ago, this would drop by almost 50% to Rs.24.65 lakh (11.27% annualised returns) if one missed the 5 best days. In other words, one makes a notional loss of close to Rs.20 lakh over a 30-year investment horizon by missing these days. The loss has further aggravated due to the power of compounding.

For illustration purpose only; Period ended June 30, 2016

An important lesson learnt from this case study is that, if one misses the best performing days in their attempt to time the market, the opportunity lost can be enormous. The simplest way to benefit from the market is to remain invested through thick and thin using a consistent and resilient approach.  Mutual funds offer this convenience of emotionless investing via Systematic Investment Plan or a SIP (#GoodEMI) wherein you can invest a fixed sum on an assigned date every month and benefit from the power of compounding. This famous quote from Margaret Thatcher, the late Prime Minister of Britain is very apt to conclude, "Don't follow the crowd, let the crowd follow you."

Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its advisor/ tax consultant prior to arriving at any investment decision.