A study found that a goalkeeper who stands in the middle — the stock market equivalent of doing nothing — has better success than one who tries to guess which way a free kick will come. It was found that goalkeepers jumped to the left or the right significantly more than was useful in preventing goals. In fact, they jumped an overwhelming 94 percent of the time – meaning they stayed in the middle only 6 percent of the time. In comparison, the shot went towards the centre 29 percent of the time. Goalkeepers, it seems, could achieve more by doing less.
Similarly in managing stocks in your portfolio, it is often best to stay in the centre and do nothing. Sitting put on your index funds & dividend stocks, not trying to find the bottom & most importantly, not panicking, serves an investor better than trying to guess and time the markets.
Experts (though you should not believe them blindly) agree that investors will be better off resisting the temptation to make changes to their long-term investments simply because of short-term stock market movements. If your personal circumstances and financial goals haven’t changed, and you are still interested in being invested for the long term, then it is probably appropriate to ‘do nothing’.
To test the benefits of doing nothing in Indian markets, we analyzed the data for last 20 years. We specifically looked at 5 & 10 year rolling returns (CAGR) of Sensex (index) to understand whether it made sense to invest once and sit through years doing nothing?
The results are shown in graphs below –
Click to enlarge
Returns on rolling 5 Years
Average 5 years returns have been a good 11.8% pa. i.e. if you invested some money in index (Sensex in this case) and did nothing for next 5 years, your money would have grown at a rate of 11.8% every year (Doubling in just over 6 years).
Click to enalrge
Returns on rolling 10 Years
Average 10 years returns have been a good 10.9% pa. i.e. if you invested some money in index (Sensex in this case) and did nothing for next 10 years, your money would have grown at a rate of 10.9% every year (Doubling in just over 6.5 years).
Now these two figures of 11.8% & 10.9% are not earth shattering, but if maintained for decades, they have the potential to make investor following do-nothing approach, super rich.
Summarizing our finding in table (below), we found some interesting things –
In all we had 201 Five-Year Periods. Of these returns earned in excess of 10% were 91 of those periods. i.e. 45%
The buy and hold strategy (for 5 Years) beat long term average of 11.8% a good 37% of the time.
For Ten Year Periods, we had a fewer 141 periods. Returns earned in excess of the long term average of 10.9% were a brilliant 59% of the time. i.e. If you stayed invested for 10 years and did nothing, chances of beating the long term average were a high 59%.
And you thought that buying and holding did not work! 🙂
So does it mean that Doing-Nothing works? We would say that it does, but only if you are ready to follow it for long term. And long term means years (decades) and not months. Frankly, there doesn’t seem much point in overanalyzing, overthinking, and exhausting oneself by trading in the short term. We must understand that it is TIME and NOT TIMING that is the key to successful investing.
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I found the article about the screeners most useful. BTW, is there any website which will give historical P/E values of stocks?
Looking at the above 2 graphs, it seems that 10 year horizon is safe than the 5 year horizon. But how sustainable is this? If you look at the graph 1, it clearly indicates that the 11.8% CAGR is arising only because of the Bull run of early 2000s; otherwise market has not given such a return at other instances.
Is this the case with other indices as well, in other economies? Because over here, one can easily make out that only those 5 years are taking the %age above the 10% mark. Look at the bars after mid 2006. they are continuously falling.
There was a site (Moneysights) which used to offer such data for free. But unfortunately, it closed down.
We dont' know of any free sites offering such data.
(Please let us know if you come across any such site) 🙂
Our guess is that it would require a little manual work on an investor's part.
One can collect EPSs of last few years from sites like Moneycontrol and use historical prices to arrive at a string of PE ratios.
Your observations are absolutely correct. Returns in Indian markets in recent past (15 years), have been governed by the last bull run.
The problem we faced while collecting data was actually the lack of it 🙂
Indian markets do not have good sources of data for past few ‘decades’. One cannot use data of last 50 years because there isn’t any. As far as other countries are concerned, rest assured that strategy of doing nothing has worked almost everywhere.
For the time being, we need to make an assumption that Indian markets would behave like other mature markets in the past. But we must also never forget what Dead Monk has to say –
“As an investor, you can never remove the risk of being wrong.”
Thanks for the information 🙂
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@Indian Stock Market
Thanks for the exciting blog posting!
I really enjoyed reading it, you are a brilliant the way you write.
Thanks a lot Supriyo… 🙂
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Stableinvestor (dev). You selectively reply to comments and the pattern is very erratic. This was a good question but you did not pay any heed to it. Makes readers not wanna come back.
If you are referring to the question posted by Vaibhav, then I replied to it almost 3 years back. Please check above. Somehow it shows the reply above the question. I guess this ordering makes it look that it went answered.
Let me know if this is the question you wanted to be answered.