Chasing the Sensex is useless

With BSE Sensex closing at spectacular high during the Diwali season, it made a big news all around. But chasing the Sensex has become an addiction to not only the media but the retail investors as well. The problem is that the euphoria corrupts the minds of retail investors and they start thinking of investing because Sensex is going up and not based on their understanding of the fundamentals of company. The question that came to my mind is that does it really matter to chase the index and to try to time the investment at lowest index to gain spectacular returns?

The answer comes out as a resounding “No”, and it is based on the historical data. I started digging at the BSE Sensex index history for the last decade starting from 2000 onwards. Let us assume that your investment exactly reflect the BSE Sensex performance. So let us compare the compounded gains when you invest at

1) Lowest Index each year

2) Highest Index each year

3) At a fixed date (say 1 Aug) each year

So if we look at the BSE Sensex for the past decade (2000 – 2010), it turns out that the index gave a CAGR return of 16.187% at lowest value investment, 13.125% return at highest value investment. The surprise is that when looking at historical data at a fixed date every year (1 Aug), the return is actually 15.501%, very close to investing at the lowest levels.

This is significant in the fact that instead of timing the market to find the lowest value, if a person invest every year at the fixed date in a steady manner, the returns are almost similar.

The key learning is to ignore the short-term sentiments of the market. If  you make steady and consistent investments, you would get decent returns without fretting over timing the markets.