Why Long-Term Investing Wins Over Short-Term Trading

On July 31, the BSE Sensex reached a remarkable milestone, closing at a record high for the fourth consecutive time. Then, on August 1, it even hit an intraday peak of 82,082, surpassing the 82,000 mark. This surge had retail investors buzzing with excitement, leading many to wonder if it was time to cash out their investments.

This behavior often stems from a trading mentality, which is quite different from a long-term investment strategy. In trading, timing is critical. A recent study by SEBI revealed that a staggering 99% of investors who dabble in futures and options end up losing money. Conversely, successful investing is more about spending time in the market than trying to time it.

The BSE Sensex serves as a perfect example. Over the past year, it has reached five consecutive highs. If an investor had sold all their holdings on July 17, 2023, when the index reached a historic high of 66,589, they would have missed out on an additional gain of 22.75% by July 31, 2024.

Investing has its advantages. Instead of putting all your money into one risky asset, you can spread it across a stable equity fund. Just think of a large-cap fund as a sturdy ship—it can ride out the storm better than a small boat, making it a safer option for investors.

In contrast to the gamble that is trading, investing emphasizes a disciplined approach. Many investors choose to contribute a specific amount each month, allowing them to benefit from rupee cost averaging through a Systematic Investment Plan (SIP).

For instance, if you had invested in a passive BSE Sensex index fund over the past year, your returns would be around 22-23%. Actively managed large-cap funds, however, offered even better returns, averaging 40% in the same timeframe.

Top companies tend to perform well during uncertain times, which is why many financial experts recommend sticking to large-cap funds if you want steady growth in your equity investments.

To illustrate the difference between investing for the long haul and quick trading, consider this: if you invested ₹1 lakh in a large fund 20 years ago, your investment would have grown to ₹21 lakh. However, if you had opted for a monthly SIP of ₹10,000 since that same time, your total could have ballooned to ₹1.28 crore.

With four stellar years in the marketplace, it’s easy to be tempted. Yet, remember that predicting market movements, especially in the short term, is nearly impossible. It’s more beneficial for investors to focus on their own goals instead of trying to time the market.