Can I combine market timing & mutual fund SIPs?

Many investors, even experienced ones do not understand what market timing is and if can co-exist with a SIP. These terms are explained for new investors in a simple manner.

Published: February 10, 2020 at 12:53 pm

Last Updated on August 30, 2021 at 8:53 am

In this article, intended for new investors, let us discuss what is market timing and if it can be done along with a SIP. Is market timing necessary and other questions.

Each time I say, “stop your SIPs and invest manually”, most readers assume I am in favour of market timing.  Even experienced investors fail to understand what market timing is, or even what a SIP  is. So let us go over this in the form of a FAQ.

What is a SIP? It is an automated method to buy mutual fund units on the same day of each month (typically)

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What is market timing? It is a method to change the amount of equity/bonds/gold exposure in your portfolio depending on one or more market levels. For example, if I hold 70% of stocks (or equity mutual funds) and find that the market is over-heated, I sell most of it and buy bonds (or other debt instruments).  When the market has cooled down, I sell the debt and buy equity.

Is it possible to time the market? That depends on your goal. If you wish to change portfolio asset allocation to reduce risk, then yes, the market can be timed. If you wish to try and get more returns (beat the market), then backtesting shows that this is pretty much a coin toss.

Getting higher returns from market timing requires luck as it is subject to the sequence of returns risk

What are the different methods to time the market? Using market PE, PB, ten-month moving average, double moving averages, Bollinger bands etc. Interested readers may explore our market timing archives to study backtests of various timing models. This Market Valuation Tool uses multiple metrics to study current market levels.

One can argue that get a return close to that of the market at lower risk is also “beating the market”. That is, a timing model returning 10% against 12% market return at 50% lower risk is also beating the market. This is a fantastic example: Want to time the market with Nifty PE? Learn from Franklin Dynamic PE Fund

I would like to buy whenever the market falls. Is this market timing?  You can call it that if you wish, but be aware that this method (often assumed to be better by those afraid to pay taxes when asset allocation is varied) neither reduced risk nor enhances returns.  See: Want to time the market? Then do it right! Buying on dips will not work! Also: Buying on market dips: How effective is it?

I was told SIPs reduce risk, is this not enough? No. SIPs do not reduce risk. See: Myth Busted: SIPs do not reduce risk or enhance returns!

If I try and time the market, should I avoid SIPs? SIP is just automated monthly investing. One can vary portfolio asset allocation and still invest each month! So market timing and monthly investing can co-exist. See: How to systematically reduce the risk associated with a SIP

Do I need to time the market? No. Efficiently asset allocation each year as per a set plan is all that is necessary to achieve our financial goals. These methods are discussed in the lectures on goal-based portfolio management.

If you have any other questions, leave a comment below.

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