What a week for the China market.
CSI 300's gain this week is the most since 2008. Yes, you read it right. This is the best week for the China market in almost 16 years! Nearly 15% rally is seen in this week alone.
And the statistics are even more astounding when we look at the Hong Kong market. Hong Kong’s Hang Seng index recorded a weekly gain of 12.75%. This makes it the index’s best week since February 1998. Yes, best week in 26 years.
I think it won't be an exaggeration to say that the past week has certainly been he best days in the China market for a long while.
While I have trimmed my stakes in China equities over the past 2 years (which I believe is the right choice despite this rally), I still stay invested in the China market.
I know there are some folks who prefer to get out of the market when it's down, and try to time the entry into the market at the best timing in their opinion.
Personally, it seems like a fool's errand to me.
Look at what happened to the China market in the past week. Who could have predicted that we will have a 15% rally in the China market in just under a week?
If you aren't invested in the market, you could have missed this big rally.
So, what happened when you missed the best days in the market? Well, apparently the difference could be really big.
If you were to miss just 10 best days in the market from January 2003 to December 2022, you could have more than half of the returns you could possibly get if you were to just stay invested in the market. Yes, just the 10 best days in the market over a period of 20 years could make a world of difference.
And the best days tend to happen during unexpected times so there isn't a good way to time the market here.
I'm a firm believer that timing the market is one of the worst things an investor could do in any market. Almost every now and then, there will be folks who tell me that they decide not to invest in the market now as the index is too high and they want to better time their entry in the market.
This conversation happens too many times and I thought it's good to show a case study here to illustrate why it never makes sense to wait for a good time to enter the market.
A research on five different investment strategies was made by Schwab Center for Financial Research. I will elaborate on what these five different investment strategies are later. But first, let me explain the mechanics of the exercise.
In this exercise, each investor (representing a different investment strategy) received $2,000 at the beginning of every year for 20 years ending in 2022. These monies are invested in S&P 500.
Here are the five different investment strategies.
1) The first guy is a perfect market timer and is able to invest at the lowest point of the market every year.
2) The second guy just invests $2,000 on the first trading day of every year.
3) The third guy does dollar-cost averaging. He divides $2,000 into 12 equal portions and invests them at the beginning of every month.
4) The fourth guy is the worst market timer and the opposite of the first guy. He invests at the highest point of the market every year.
5) The fifth guy left the money in cash investments and never ever invests as he thinks that the market can always go lower.
When we look at the results of their investments at the end of the 20-year period across 78 separate examples, we found something similar throughout the results.
The winner is obviously the first guy as he times the market perfectly each time. However, the second guy isn't too far off from him. Even the third guy who does dollar cost averaging fares is pretty close to the second guy.
You must be thinking that the fourth guy must have done very poorly here. Hell, no! His gap with the third guy isn't too significant and he has three times as much money as the fifth person who doesn't invest at all! For full results, refer here.
Many times, we want to avoid being the fourth guy and hence we start being the fifth guy who lurks around for the next better opportunity. In fact, we want to be the first guy who can time the market perfectly.
However, it's not reasonable to behave in such a manner. In fact, it's pretty foolish.
Think about it. We are trying to invest at the lowest point of the market while avoiding the highest point of the market. The chances of us investing at the lowest point of the market is significantly small. Chances are we will be investing in a period somewhere in between the lowest point and highest point of the market.
With the market going up 75% of the time, time in the market is a lot more important than timing the market.
If you are still waiting to enter the market, just remember. Don't be the fifth guy.
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