Steady investments can beat the market by a mile

4 NOV, 2010, 01.31AM IST,
AMAR PANDIT,

Steady investments can beat the market by a mile

Guessing the index seems to be like an exciting pastime for most investors. They look at the index as some sacrosanct indicator to decide whether they should buy a stock.

“Sensex is back to 20000 and I feel something wrong is going to happen again,” said one learned acquaintance. “The markets are overvalued and I will invest when it corrects,” said another gentleman who did not even invest when the market was at 8000, thinking it will go down to 6000.

I asked many people who have been investing since 2005, “Do you remember the index levels in the year 2005?” Almost everyone replied in the negative. In 2005, the Sensex was between 6103 and 9397. I remember in 2005 a lot of people called even 6600 as a high level. One client had even said, “Let’s wait till 5000.” But guess what: he does not even recall the 2005 level remotely. This is because people have made fantastic returns over five years and it’s no longer important whether you invested at 6500 or 7000 or at 7500.

Here is why index levels should not be a real determinant of your investing decision: A difference between the lowest level every year and a fixed level every year over a long time frame does not matter at all.

Consider three different scenarios of index: 8000 in 2009, 13500+ in June 2009 and 18000 levels in August 2010.

1. Let’s say you started investing in 1991, when liberalisation in India started. If you managed the feat of investing at the lowest level every year since 1991, your annual returns would have been 15.88% CAGR as of June 1, 2009 at 13500+ levels. 
2. On the other hand, if you invested at the highest level every year, your returns would have been 11.78% CAGR. 
3. Now, if you had invested on a fixed date every year, let’s say, January 1, then your returns would have been a surprisingly 15.77%. 
4. The difference between a fixed date and the lowest date is just 0.11% pa.

Since 1991, the CAGR as on March 9, 2009,

• for annual investments made at the highest Sensex levels was 8.21%, 
• while it was 12.18% when the investments were made at the lowest levels. 
• For investments made on January 1 every year, it was 12.08%.

Similarly, since 1980, the CAGR as in August, 2010,

• for annual investments made at the highest Sensex levels was 16.19%, 
• while it was 17.60% when the investments were made at the lowest levels. 
• For investments made on January 1 every year, it was 16.91%.

Think for a moment. Does the paltry difference in returns between the lowest levels and regular investments really matter to you? For most equity investors, the answer will be a resounding no.

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