What is the right time to invest in stocks?

What’s the best time to buy and sell stocks? Should I buy at the Current Market Price (CMP) or wait for some more time? Should I buy stocks when they fall or when they rise?  Many investors face this dilemma irrespective of their experience in the stock market. Similarly, mutual fund investors too wonder what the best SIP date to invest in equity mutual funds is.

If you too have tussled with these questions, read on...

Here’s why you shouldn’t bother much about timing the market

In pursuit of timing the perfect entry and exit, many investors forget to appreciate the power of compounding.

Let’s assume you invested Rs 10 lakh in a portfolio of stocks for three years and your investments fetched you 12% CAGR (Compounded Annual Growth Rate) returns.  As against that, even if you earned just 10% CAGR returns but increased your holding period from 3 years to 5 years, it would have made a noticeable difference to the performance of your investment portfolio.

‘NOW’ is the right to invest in stocks

When you don’t give your investments enough time to grow, you start depending more on earning higher returns by timing the market. And as the market history suggests, no investor has consistently managed to time the market for a long time.

If you are new to stock market investing, instead of bothering about the right time to invest in stocks you may spend some time to decide what your personalised asset allocation should be. For instance, a 25-year old unmarried individual can take higher risks and may have a longer time horizon to achieve some important life goals such as retirement. Contrary to that, the risk appetite of a person in their early 50s would be lower given the focus of securing a corpus for retirement.

A thumb rule to invest in equities

A thumb rule suggests that your maximum equity allocation can be 100 minus your age. In other words, for a 25-year old investor it could be 75% and for a 35-year old person it could be 65% and so on.  This number of course is indicative and depends vastly on your risk appetite.

Here’s how you can start

Choosing multiple SIP dates…

You eliminate the need to time the market when you start an SIP (Systematic Investment Plan) in an equity mutual fund scheme. SIPs allow you to buy at different levels without intervening every time markets go up or down. So any date is fine as long as you stick to your SIPs and don’t stop them abruptly unless the scheme you have invested in has been consistently underperforming.

If you invest in multiple schemes, you may choose multiple SIP dates say 7^th, 15^th and 24^th instead of just one to further defuse the role of market timing.

How savvy investors/traders decide when to buy a stock?

Professional investors who have already taken care of their personal asset allocation and are working largely towards wealth maximisation may think slightly differently.

They might pay close attention to the fundamentals, return ratios and long term prospects of the companies they are looking to invest in. When stock valuations appear cheap vis-à-vis their prospects, they tend to buy stocks and sell when the valuations look stretched and the prospects appear lacklustre.

On the other hand, professional traders might not care much about personalised asset allocation or the long term fundamentals of companies they are investing in. However it is important to remember that there decisions are taken from the perspective of active trading & not passive investment. They will rely more on market momentum and try to take the maximum advantage of market trends.

In a nutshell

Unless you are a professional trader/investor, worrying about market timing may be unpredictable for you. Instead, you can rely on the the power of compounding and make sound investments with a long term view.