The reason you should remain invested

In a recently released movie, ‘Baazaar’ scripted against the background of the stock market, the protagonist of the film in one of the scenes, says, ‘main maths pehle karta hun aur bolta baad mein hun’ (I do maths first and then speak). This line clearly shows the importance of ‘maths’ or rationality in the stock market.

Nevertheless, it is ironic that in the stock market most of the investors are guided by emotions such as greed and fear that drives their investment behaviour. Most of the investors, especially retail investors, invest when the market is at a higher level and sell when the market falls. Just against the conventional wisdom of selling high and buying low.

The recent correction also saw that most of the investors either stopped their investments or redeemed their investments and are waiting for the right time to invest.  Nevertheless, the historical data shows that if you miss some of the best performing days in the market while trying to get the timing right, your long-term returns get diminished a lot. For example, over a 30-year period, the best single-day performance of the Sensex was on May 18, 2009, when the index was up by 17.34 per cent. However, most investors may have stayed away from the bear market as the index was down by over 60 per cent from January 8, 2008, to March 9 2009 (Sensex value moved from 20,873 to 8,160). This fright of losing more money usually sees investors staying away on such occasions till they see a secular bull run.

The following graph clearly shows the opportunity loss one could face over the long run by staying away even on a few of these best performing days. The black line shows that if you would have remained invested throughout, every one rupee invested would have been Rs. 276.36. However, it would have missed the best five days of investment, your rupee one would have become Rs. 151.99. The red line in the graph below shows how Rs 1 would have grown.


 

Putting the above graph in a tabular form will show how even missing a few best days of return would impact your returns adversely.