Just enjoy the show
In a football game, if you were to pick a minute at random, the odds of it being a rather uneventful would be quite high. This is because football games are typically characterized by long stretches of play where not much happens, punctuated by brief moments of excitement such as goals, fouls, or other notable events.
Take the 2022 Football World Cup Final for instance. Argentina dominated the game for 79 minutes, with Lionel Messi scoring from the spot in the first half, and Angel Di Maria adding a second to give Argentina a two-goal advantage. France, on the other hand, barely had a chance to attack, and failed to have a single touch in the opposition box during the first half of the game. The game seemed done and dusted.
It wasn’t until the 80th minute that France decided to turn it up. Kylian Mbappe scored from the spot, and just 97 seconds later, added another to level the game and force extra time. In the end, the game ended in a 3-3 draw, with Argentina winning the trophy in a penalty shootout.
Despite being an incredible game with 4 goals scored in normal time, the odds still remain the same. Pick a minute at random in the first ninety minutes and chances are you watch Argentina dominate without scoring.
This is similar to how investment returns often behave. Most of the time, the returns on an investment will be fairly normal, with small fluctuations up or down. However, it is only occasionally that the returns will be extremely high or low, much like how goals in a football game are relatively rare events.
Knowing this as investors, an important lesson that can be drawn from the football field is the importance of staying in the game. This is because often it is very difficult to predict when a goal may come.
All of us who watched the World Cup Final know this. It would have been a big mistake if we shut the television seventy-five minutes in, because we thought the game was over. Similarly, trying to time those extremely good months while trying to avoid those extremely bad months can be a very difficult task.
The chart above shows the distribution of monthly Nifty returns for 264 months from January 2000 to December 2021. What is remarkable is just how much the extremes may skew returns. If you were to remove the 20 best performing months from this data, and stay invested for the remaining 244, you would end up with no returns. Similarly, if you magically avoid the 20 worst months your returns may increase by more than 10x. The trouble as touched on earlier is the difficulty in getting those months right and the risk that you take by trying to time it.
Given this pattern, it is important for investors to stay the course and not get too caught up in the occasional periods of high or low returns. Much like a football game, a moment of magic or madness may be round the corner, but as one may struggle to predict it, it’s best to stay invested and enjoy the show.
This article is authored by Dhruv Maniyar who as of February 2023, is Assistant Manager (Research) at IIFL Asset Management.
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