It is impossible to pinpoint the exact top and bottom of a market cycle. According to White Oak MF, at best, investors can construct and implement a valuation checklist if they deviate from their Strategic Asset Allocation, which should assist them reduce portfolio-level volatility to some extent while engaging in the equities market.
Still, suppose you have some magical power, can forecast the exact top and bottom, and want to start a long-term SIP. So, should the investor begin SIP at the top or bottom of the cycle? WhiteOak conducted a thorough review of long-term BSE Sensex TRI data (for the previous 28 years). It took all those occasions when the equity market fell more than 20% from its peak. The table below shows the investment summary of two investors, one who initiated a Rs. 10,000 monthly SIP at the peak of multiple market cycles and the other at the bottom:
Key Findings: Timing Isn’t Everything
Wealth Creation vs. % Return: The analysis discovered that while the percentage return was somewhat greater for SIPs that began at the bottom of the market cycle, the absolute gain (wealth creation) was much larger for SIPs that began at the top. This discovery calls into question the widely held idea that entering the market at the lowest possible price guarantees higher long-term gains.
For example, if an investor began a monthly SIP of Rs. 10,000 in January 2008 (just before the market began to decline), they would have invested a total of Rs. 20.4 lakh by the end of December 2024. This investment would have risen to Rs. 72.1 lakh, with an XIRR of 13.5%. On the other hand, if the same investor had begun their SIP in March 2009 (after the market bottomed), they would have invested Rs. 19 lakh and seen their portfolio increase to Rs. 61.7 lakh at an annualized return of 13.6%.
The Cost of Delay: Another noteworthy finding in the paper is the “Cost of Delay”—the longer investors wait for the market to reach rock bottom, the bigger the potential opportunity cost. As time passes and the market rebounds, waiting to enter can result in major missed chances. This demonstrates the power of compounding: even small variations in short-term returns tend to flatten out in the long run.
Consistency is Key: Over time, whether an investor begins at the top or bottom of the market cycle, the percentage difference in returns tends to balance out. This means that consistent, disciplined investing, even in less-than-ideal market conditions, will likely produce similar long-term benefits.
The Power of Compounding: The paper underscores that market risk is secondary to the risk of missing out on long-term compounding. For investors looking to build wealth, the important conclusion is clear: stay involved, be steady, and let time work in your favor. The ability to weather market cycles and invest consistently is likely to result in greater wealth development than attempting to predict the exact peak and bottom of the market.
The Numbers Behind the Report: The mean returns for the Sensex and Nifty 50 during the last decade (from June 2014 to May 2024) were 12.62% and 12.42%, respectively, underscoring the notion that consistent market involvement is more profitable than trying to plan it perfectly.
Market Timing Is a Myth: While the data shows that starting at the top can sometimes yield higher returns in terms of absolute wealth creation, the reality is that trying to time the market with precision remains a risky and often fruitless endeavor. In fact, the marginal return differences between top and bottom start points over long periods suggest that consistent SIP investments—regardless of market cycles—are the most effective way to build wealth in the equity markets.
For investors, the message is clear: the biggest risk is not the market itself, but the missed opportunity of long-term compounding. Investing regularly and sticking to a strategic asset allocation will likely lead to superior wealth creation than trying to time the market.
While this study relies on historical data, prior performance does not guarantee future outcomes. Before making any investment decisions, investors should contact with a financial adviser. To make the numbers easier to grasp, taxes and other transactional fees are excluded.
