Sharp market swings often encourage investors to wait for the ‘perfect’ buying opportunity. For example, the market correction during the COVID-19 crash in 2020 rewarded investors who had the liquidity to buy when markets had nearly halved. As markets rebounded rapidly, those investments generated outsized returns. But is market timing really the smartest strategy?
Speaking on the topic, Abhishek Kumar, SEBI-registered Investment Adviser (RIA) and Founder of SahajMoney, says, “Historical research shows that buying the dip reliably underperforms a systematic investment plan. This is because markets structurally rise more often than they fall, keeping cash on the sidelines waiting for a market decline creates an opportunity cost known as cash drag.”
Even an investor with perfect knowledge of every market bottom would underperform a systematic strategy over 70% of the time as the market might continue to rise and leaves the cash hoarding investor behind.
Let’s understand this an easy exmaple:
Suppose an investor has ₹30,000 to invest every month ( ₹3.6 lakh over a year).
Investor A starts a SIP and invests ₹30,000 every month, regardless of market movements. Over 12 months, invests a total of ₹3.6 lakh.
If the market delivers around 12% annual returns, the SIP would be worth roughly ₹3.82 lakh by year-end (actual returns will vary depending on market movement).
Meanwhile, investor B, waits for a market correction. For this, he sets aside ₹30,000 every month in cash, expecting a 10% market correction.
Scenario 1: No market correction
Now, let’s consider, no correction happens in a particular the year, and the market instead rises by about 12%. That means, at the end of the year, the investor has ₹3.6 lakh in cash but has earned no market returns.
The SIP investor, meanwhile, has a portfolio worth about ₹3.82 lakh—a difference of roughly ₹22,000.
Scenario 1: In case of market correction
Suppose the market rises 20% in the first eight months and then falls 10%. After the fall, the market is still 8% above where it started. The investor waiting for a “10% dip” ends up buying at prices that are still higher than those available months earlier.
The SIP investor, meanwhile, has been accumulating units throughout the year, including at lower prices before the rally and during the correction.
Hence, “for retail investors earning a regular monthly income a steady SIP serves as the most effective investment strategy. So instead of attempting to time the market one is better off by automating their investments thus removing emotional pressure of holding cash,” Kumar notes