SMART INVESTING : The biggest concern of investors while investing in the market is the risk involved in chasing high returns. Smart investors are well aware that the market cannot be predicted in any way. Any investment can have gains or losses in the short term, but investors looking for higher returns prefer to invest for a longer period. Often there is a debate in the market about Time in the market and Timing the market. Many investors try to predict the future market value of a stock while investing. The risk in this is very high. This investment strategy is called timing the market. On the contrary, many investors invest for the long term. Such investors buy stocks without trying to predict when the market will be bullish or bearish. This investment strategy is called Time in the Market. Now the question is what is the better strategy between the two.
timing the market
Timing the market means that an investor is trying to predict the future share price of a stock. Although this method is good to think that buy at low price and sell when price is high. But the risk in this method is very high. Maybe someday your ‘luck’ is good and you will get more returns from this strategy, but the biggest weakness of this strategy is ‘luck’. Someday it may happen that your luck is not good and you may suffer a lot. No prediction can be made about the future in the stock market. Stock prices change rapidly, which means that your estimates may not always be accurate. If any financial advisor advises you to invest with this strategy then you should be alert. In timing the market, sometimes you may have to suffer a lot of loss. If you are taking the help of a broker, then frequent trading increases the cost of brokerage commission. The more stocks are bought and sold, the more commission the broker earns. The worst part in this is that this commission has to be paid by the investor, even if he is incurring a loss in the market.
time in the market
Time in the market is completely different from timing the market as in this strategy predictions are not made for short duration. Here the investor will not try to guess whether the market is at its lowest level or at its highest level. In this, while buying a stock, the investor knows that its timing may not be right, but in the long term, that stock can give higher returns. If the stock is fundamentally strong and has the potential to deliver higher returns in the long term, then in the short term, the fluctuations in the price of that stock may not make much difference.
This strategy proves that giving time to the market and being patient is more beneficial than short term investments. When one holds a stock for 10 years, the positive effect of compounding and investment growth gives good returns. Investors who invest with patience get higher returns. To generate high returns in the long term, it is necessary to spend time in the market. By doing this, the investor gets a handle on the natural market cycle. Some people may find it difficult to spend more time in the market, but they should understand what their financial goals are in the long term. By waiting for steady growth over time, smart investors can achieve their long-term financial goals.
(This article has been written by Parthajit Kayal and Malvika Saraf. Kayal is an assistant professor at the Madras School of Economics, while Saraf is a recent graduate of the Madras School of Economics.)