Let us say you and your friend plan a long train journey from Kanyakumari to Jammu. You are risk averse and you stick to one single train from Kanyakumari to Jammu, while your friend decides to be adventurous and changes trains whenever there is a layover. What's his motive in doing that? He believes that he will get to Jammu faster than you will by 'saving' the layover time. He doesn't want to wait in the interim stations. He wants to be on the move, constantly. What happens at the end and why we are giving this case study here.Read ahead to learn more on this.
Demystifying time vs. timing:
Timing is the active hunt for entry and exit of investments. Timing helps you get in and out of investments and make huge profits at the end of the trade. It is like fishing in troubled waters. You buy a stock when it is at a lower price and expect it to go up. You then sell when the stock is about to fall. You expect that these actions to give you handsome profits. You portfolio grows with each profit and diminishes with each loss.
Time is the amount of time an investor gives his investment to grow.
Let us consider the example of a crop. To get the best results, you follow a well-tested process. You have to plant the crop at a specific time- based on rainfall, seasonality, temperature etc. This is TIMING. The period it takes for a crop from seeding to harvest is TIME.
Which is the right strategy while investing?
So, how do you think the scenario proceeds, between Kanyakumari and Jammu case study we gave in the beginning?
While you are on a set path, cosy and comfortable in your reserved seat and berth, your friend is running pillar to post. You can catch a nap, watch the scenery, listen to music, and eat in peace with your fellow travellers while your restless friend is constantly getting in and out of trains, lugging his bags and baggage across railway stations and unreserved carriages, caught in a medley of conversations with ticket clerks speaking unfamiliar languages.
He swats flies and mosquitoes trying to sleep on platforms, misses connecting trains, misses a lunch or dinner and sleeps through a departure. His connecting trains might be delayed. They might just be unavailable. His cost increases dramatically. Unless, of course, he ‘jumps mathematically' between trains, to quote from a fiction Phineas Fogg from ‘Around the world in 80 days'. What does that tell you?
Hyper Investor Vs Regular Investor
So, your friend is similar to a hyper investor who just cannot be regular with investments. He believes that a well-timed entry and exit in a trade will get him great results. He tracks the stock market, equips himself with financial knowledge and watches market related news every day.
He tries to implement strategy advice from well-wishers and random strangers. He works with 'timing' as his investment mantra. He looks to buy when low and sell when high. Does that sound simple? If only it were as simple as that. Figuring out market trends is as easy or tough as figuring what's going on in a woman's mind. Have you accompanied a freaky shopper to shop when it's sale season? If you have, you know what I am talking about.
Coming back to the travel situation, a traveller like you, who chose to stick to one train, gets in to a scheme and sticks to it for a long time. You invest in an equity scheme for specific purposes, like your child's education, your retirement plans etc. You do not take it out and invest it elsewhere or play an arithmetic game with it. You choose, based on your investment advisor's suggestions, a 10 year plan where you invest a fixed sum every month.
The yield is realistic, say, 12% per annum. In short, you are not a gambler. Your friend plays Russian roulette. You are the metaphorical tortoise, as opposed to the hare, your restless traveller friend.He spends sleepless nights, thinking of how the market will perform and affect his investments. He wins a few, he loses a few... He has no certainty. His assets fluctuate.
Long term goals like retirement plans or children's education and marriage need long term saving schemes and necessarily, long yield periods.
Market timing definitely pays. But it is a risky game. It is quite a hassle and transaction costs are pretty high. Your adrenalin becomes highly dependent on the ups and downsides of the financial market.
Patient and steady investment schemes are recommended for assured long term returns. After all, it is slow and steady that wins the race.
K. Ramalingam is the chief financial planner at holisticinvestment.in, a leading financial planning and wealth management company