How waiting for a market crash backfires

By Larissa Fernand |  01-09-21 | 
No Image
About the Author
Larissa Fernand is an Investment Specialist. Follow her on Twitter @larissafernand

In Invest Like You Give A Damn, the author has an interesting narration.

Way back in March 2008, he was stuck in a traffic jam in Mumbai and was reading the innumerable billboards alongside the highway. On one he saw a picture of a gleaming, oversized New York blue glass skyscraper apartment building with improbable hanging gardens on random floors. The advert was for an investment fund with a “guaranteed return of 20%”. At that moment, it dawned upon him how messed up the market was. Within two weeks he was 90% in cash.

But here is where he goofed up. He bought into the world collapsing syndrome and refrained from re-entering the market until 2012. According to his calculations, it resulted in a loss of 4% and an opportunity cost of around 28%.

LESSON: Market timing is as much about understanding the market as it is about understanding your capacity to make investment decisions.

Vitaliy Katsenelson, recently explained it in detail, calling it the Market Timer’s Gambit.

Their argument is logical: “I am going to stay on the sidelines for now and will go in after the market dips”

There are two problems with this strategy. First, market irrationality can last a long time. And second, though it sounds good in theory, in practice it is very difficult to execute.

Let’s say you went 100% in cash waiting for the market to correct.

The market declines 10%. You feel slightly vindicated, but the market just settled to where it was a few months ago. Get in or wait? The market is declining, so you decide to wait.

The market is down another 10%. You feel a bit more vindicated. You feel rewarded for your patience and for the last few years of return you’ve missed out on. But your gut tells you if the market declined 20% and it can go down lower. You wait.

The market declines another 10%. Economic news is ugly. The market decline may send the economy into a recession. Or the economy is already in a recession. Now you are worried. You decide to wait.

The market declines another 10%. This cash now feels so dear you don’t want to part with it. You feel like you’ve got this figured out. You tell yourself you’ll invest when the news gets better.

The market has a few strong days. But the news is not getting better. Commentators call them a dead cat bounce, expecting further declines. These few strong days are followed by a few more.  Suddenly the market has retraced the last 20% of the decline. You feel bad that you didn’t invest two weeks ago (at the now “obvious”) bottom.

I can continue but I won’t. You get the point.

LESSON: Once you are completely out, it is incredibly difficult psychologically to make a binary decision to dive back into the market. Even if you got the market timing right once, putting it into a repeatable process is impossible.

Monika Halan addressed this issue as the Sensex soared 765.04 points to close at 56,889.76 (August 30, 2021).

You were either getting a big dose of FOMO (Fear Of Missing Out, if you were sitting on the sidelines waiting for the inevitable crash to enter) or widely grinning (pleased with your equity allocation strategy being right).

I ask the FOMO tribe this: If you found the market to be too risky at 27,590.95 on April 3, 2020, why would you invest in it when it has more than doubled in 16 months? You saw the market crash from 41,000 to below 28,000 and found the risk un-takeable. For you, the market was too risky at 28,000, and it is "too high" now.

I have heard the “too high, too risky, too volatile, too overvalued” cries numerous times in the past, when the Sensex crossed

  • 4,300 (1992)
  • 5,000 (2000)
  • 6,000 (2004)
  • 10,000 (2006)
  • 15,000 (2007)
  • 20,000 (2008)
  • 30,000 (2017)
  • 40,000 (2019)
  • 50,000 (2021)

LESSON: There is no best time to enter the market.

If you have been averse to the stock market so far, do not break a fixed deposit to invest everything into it. Enter slowly. Have a long-term perspective in mind.

The first rule of investing is it should not dislodge your peace of mind. Everything else is noise.

Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.

Add a Comment
Please login or register to post a comment.
ninan joseph
Sep 5 2021 11:23 AM
 The moot point for any investor is to identify a good business. Once you do that then it does not matter what price you are paying for this, because there is always a section of people who think the current price is high and another section who think current price is reasonable or low. This is what makes market tick. No point for retail investor to think of what the overall market is doing or not. If the identified stock is going low, buy into it and average your cost, at the same time when the stock goes up, sell part of it and average it. This is the only way to make money. If retail investors keep thinking of what the overall market is doing he will never buy into anything.
Mutual Fund Tools
Ask Morningstar