{"id":17927,"date":"2020-03-04T12:32:26","date_gmt":"2020-03-04T07:02:26","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=17927"},"modified":"2020-03-04T12:31:55","modified_gmt":"2020-03-04T07:01:55","slug":"things-no-one-tells-you-about-exit-now-enter-later-strategy","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/mf-research\/things-no-one-tells-you-about-exit-now-enter-later-strategy\/17927","title":{"rendered":"Things No One Tells You About &#8216;Exit Now and Enter Later&#8217;"},"content":{"rendered":"<h5><span style=\"color: #000080;\"><b>Eavesdropping on your mind-voice during a market decline<\/b><\/span><\/h5>\n<p><span style=\"font-weight: 400; color: #000000;\">Whenever equity markets decline, there is usually some bad news attached to it.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Intuitively, the first instinct is to extrapolate the bad news and expect the markets to fall further.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">However, listening to our boring (yet effective) advice that \u201cno one can\u2019t predict the markets in the short run\u201d, you decide to stick with your long-term investment plan.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">But as luck would have it, the market falls again just as your intuition had rightly suggested.<\/span><\/p>\n<p><span style=\"color: #000000;\"><b>This point in a falling market where your intuition proves to be right in the short-term is where most mistakes are made.<\/b><\/span><\/p>\n<p><span style=\"color: #000000;\"><span style=\"font-weight: 400;\">While we told you \u201cno one can predict the markets in the short run\u201d, you actually predicted that markets would fall and the markets fell exactly as per your prediction.<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">Slowly, doubt creeps in. If only, you had listened to your \u2018intuition\u2019 instead of us and moved out. You were right and we were wrong. Period.<\/span><\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Obviously you are annoyed with us.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">We still stick our neck out and give you the same boring time tested advice &#8211; <\/span><\/p>\n<p><span style=\"color: #000000;\"><b>\u2018Stick to your plan. This too shall pass\u2019<\/b><\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">The market falls further. This time you totally lose it.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">\u201cFor God\u2019s sake please take my money out. I am done with this can\u2019t-predict-nonsense\u201d. You finally cave in and take your money out.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">And you utter the 5 most dangerous words&#8230;<\/span><\/p>\n<p><span style=\"color: #000000;\"><span style=\"font-weight: 400;\">\u201cI will <\/span><em><b>exit now and enter later <\/b><\/em><span style=\"font-weight: 400;\">at lower levels when things improve\u201d\u00a0<\/span><\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Till now everything seems perfectly logical.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Why in the world should someone put up with the emotional pain of watching their hard-earned money decline day by day?\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">All you need to do is, just move out and stop the fall in your portfolio.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Then you can enter back later once things become better.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">If you agree with this line of thought, welcome to the rest of us.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">There is only one small problem. Getting back into equities at the right time is unbelievably hard.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Next obvious question&#8230;<\/span><\/p>\n<p>&nbsp;<\/p>\n<h5><span style=\"color: #000080;\"><b>Why is getting back into equities after exiting so difficult?<\/b><\/span><\/h5>\n<p><span style=\"font-weight: 400; color: #000000;\">Instead of some theoretical mumbo jumbo, let us time travel back to the 2011 market crash led by Euro crisis concerns.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Indian equity markets (represented by Sensex) fell by 28% starting Nov-2010 till Dec-2011. Then they recovered and rallied by 96% till Jan-2015.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Now take a few seconds and visualize this fall in your mind. How does it look?<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Something like this&#8230;<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/1-1.jpg\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17949\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/1-1.jpg\" alt=\"\" width=\"1097\" height=\"616\" srcset=\"https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/1-1.jpg 1097w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/1-1-300x168.jpg 300w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/1-1-768x431.jpg 768w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/1-1-1024x575.jpg 1024w\" sizes=\"(max-width: 1097px) 100vw, 1097px\" \/><\/a>\n<p><span style=\"font-weight: 400; color: #000000;\">So the simple thing to do would be to exit once the fall starts and enter back when the rise starts.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">If this is all there is to it, why do we tell you that the \u2018exit and enter back\u2019 strategy is so difficult to execute?\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">For that, let us check the real version. <\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/2.jpg\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17950\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/2.jpg\" alt=\"\" width=\"1465\" height=\"771\" srcset=\"https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/2.jpg 1465w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/2-300x158.jpg 300w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/2-768x404.jpg 768w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/2-1024x539.jpg 1024w\" sizes=\"(max-width: 1465px) 100vw, 1465px\" \/><\/a>\n<p><span style=\"font-weight: 400; color: #000000;\">Reality seems a lot different. If you notice, the fall is not a one-way smooth straight line as we imagined.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">The path is extremely messy and unpredictable. There are so many false-upsides during the fall.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"color: #000000;\"><i><span style=\"font-weight: 400;\">Imagine, if you had exited right before the fall and waited to enter back.<\/span><\/i><\/span><\/p>\n<p><span style=\"color: #000000;\"><i><span style=\"font-weight: 400;\">The market is up by 7%. Is it the start of the recovery? Should you enter back?<\/span><\/i><\/span><\/p>\n<p><span style=\"color: #000000;\"><i><span style=\"font-weight: 400;\">Oops. It\u2019s started to fall again.<\/span><\/i><\/span><\/p>\n<p><span style=\"color: #000000;\"><i><span style=\"font-weight: 400;\">The market is up by 12% &#8211; Is it the start of the recovery? Should you enter back?<\/span><\/i><\/span><\/p>\n<p><span style=\"color: #000000;\"><i><span style=\"font-weight: 400;\">Oops. It\u2019s started to fall again.<\/span><\/i><\/span><\/p>\n<p><span style=\"color: #000000;\"><i><span style=\"font-weight: 400;\">The same story continues 7 times over the next 1 year.<\/span><\/i><\/span><\/p>\n<p><span style=\"color: #000000;\"><i><span style=\"font-weight: 400;\">Now when the 8th time the same pattern of a quick upside happens, what would be your reaction?<\/span><\/i><\/span><\/p>\n<p><span style=\"color: #000000;\"><i><span style=\"font-weight: 400;\">\u201cNo worries. I have already seen this before. It will fall further\u201d &#8211; the market has successfully lulled the pattern-seeking-brain of yours into complacency and overconfidence.<\/span><\/i><\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">And here is the killer.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Even the recovery is not smooth. It has several false declines, playing with your mind and always keeping you confused in the short run.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">To add to the pain, is the extreme volatility in weekly returns.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Check the weekly returns for the entire period. Can you differentiate the period of fall from recovery?<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/3.jpg\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17951\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/3.jpg\" alt=\"\" width=\"1438\" height=\"572\" srcset=\"https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/3.jpg 1438w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/3-300x119.jpg 300w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/3-768x305.jpg 768w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/3-1024x407.jpg 1024w\" sizes=\"(max-width: 1438px) 100vw, 1438px\" \/><\/a>\n<p>&nbsp;<\/p>\n<h5><span style=\"color: #000080;\"><b>More evidence&#8230;<\/b><\/span><\/h5>\n<p><span style=\"font-weight: 400; color: #000000;\">This is not a story specific to the 2011 fall. All falls have a similar trajectory with several false upsides during the fall and several false downsides during the recovery.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Let us check what happened during Jan 2015 &#8211; Feb 2016.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">The market fell 23% during Jan 2015 &#8211; Feb 2016 led by fears of a slowdown in China. This was followed by a recovery in 2016.<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/4.jpg\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17952\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/4.jpg\" alt=\"\" width=\"1337\" height=\"767\" srcset=\"https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/4.jpg 1337w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/4-300x172.jpg 300w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/4-768x441.jpg 768w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/4-1024x587.jpg 1024w\" sizes=\"(max-width: 1337px) 100vw, 1337px\" \/><\/a>\n<p><span style=\"font-weight: 400; color: #000000;\">There were more than 6 false upsides during the 23% fall and 3 false downsides during the recovery.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">You can see a similar version of \u2018extreme volatility\u2019 in weekly returns&#8230;<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/5.jpg\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17953\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/5.jpg\" alt=\"\" width=\"1312\" height=\"485\" srcset=\"https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/5.jpg 1312w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/5-300x111.jpg 300w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/5-768x284.jpg 768w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/5-1024x379.jpg 1024w\" sizes=\"(max-width: 1312px) 100vw, 1312px\" \/><\/a>\n<p><span style=\"font-weight: 400; color: #000000;\">You get the picture.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">The reality is a lot messier and unpredictable than you thought.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Add to it, the fact that usually governments and central banks, have many tricks up their sleeves and keep announcing several measures to address the situation. You never know which one the market takes up seriously and which one it tends to ignore.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Also, markets usually recover much before the actual change in fundamentals, as expectations and sentiments change much ahead of time.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Now you know the answer, to why market timing is such a difficult task (if not impossible) to consistently pull off successfully over a long time frame.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">The near term &#8211; to be brutally honest &#8211; is extremely difficult to predict.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">This is why we take the humbler approach of not trying to time the markets and ask you to take the time-tested approach of \u2018sticking to your asset allocation plan and riding it out\u2019.\u00a0<\/span><\/p>\n<p><span style=\"color: #000000;\"><span style=\"font-weight: 400;\">For the brave ones, you can even convert the fall into an opportunity via the \u2018what-if-things-go-wrong\u2019 plan (refer our earlier blog <\/span><span style=\"color: #3366ff;\"><a style=\"color: #3366ff;\" href=\"https:\/\/www.fundsindia.com\/blog\/research-desk\/are-you-worried-about-the-corona-virus\/17843\"><span style=\"font-weight: 400;\">here<\/span><\/a><\/span><span style=\"font-weight: 400;\">)<\/span><\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">In case you are wondering how this advice pans out in the long run, look below&#8230;<\/span><\/p>\n<a href=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/6.jpg\"><img loading=\"lazy\" class=\"alignnone size-full wp-image-17954\" src=\"https:\/\/www.fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/6.jpg\" alt=\"\" width=\"1337\" height=\"726\" srcset=\"https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/6.jpg 1337w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/6-300x163.jpg 300w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/6-768x417.jpg 768w, https:\/\/fundsindia.com\/blog\/wp-content\/uploads\/2020\/03\/6-1024x556.jpg 1024w\" sizes=\"(max-width: 1337px) 100vw, 1337px\" \/><\/a>\n<p><span style=\"font-weight: 400; color: #000000;\">Despite all the short-term volatility, long-term faith in equities, patience to ride the declines out and the discipline to stick to the plan has always led to decent long-term outcomes.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h5><span style=\"color: #000000;\"><b>Summing it up<\/b><\/span><\/h5>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">Timing the fall is pretty difficult<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">If in case you manage to do that, it\u2019s not over yet &#8211; getting back in is even more difficult<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">Why? &#8211; The fall and recovery do not follow a smooth straight-line path as we visualise in our mind<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">There are several false upsides during the fall and several false downsides during the recovery &#8211; making it confusing and emotionally challenging<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">The reality is that near term stock market movements are extremely messy, unpredictable and random<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">Our suggestion<\/span>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">Stay Humble<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">Keep faith in equities for the long-run &#8211; proxy for human ingenuity, grit and ability to innovate\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">Stick to your asset allocation plan<br \/>\n<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">If possible convert the fall into an opportunity via the \u2018what-if-things-go-wrong\u2019 plan\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400; color: #000000;\">This too shall pass<\/span><\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<p><span style=\"font-weight: 400; color: #000000;\">Is this plan exciting? The answer is an overwhelming \u201cNo\u201d.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">But as the bestselling personal finance author, Ramit Sethi puts it,<\/span><\/p>\n<p><span style=\"color: #000000;\"><i><span style=\"font-weight: 400;\">\u201cMost of us would rather fail at something exciting than succeed at something boring\u201d<\/span><\/i><span style=\"font-weight: 400;\">\u00a0<\/span><\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">The choice is yours.<\/span><\/p>\n<p><span style=\"font-weight: 400; color: #000000;\">Happy Investing \ud83d\ude42<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Eavesdropping on your mind-voice during a market decline Whenever equity markets decline, there is usually some bad news attached to it.\u00a0 Intuitively, the first instinct is to extrapolate the bad news and expect the markets to fall further. However, listening to our boring (yet effective) advice that \u201cno one can\u2019t predict the markets in the [&hellip;]<\/p>\n","protected":false},"author":37,"featured_media":17937,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[506,509,376],"tags":[200,201,108,517,289,148,280,516,518,151,286],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v17.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Things No One Tells You About &#039;Exit Now and Enter Later&#039;<\/title>\n<meta name=\"description\" content=\"Whenever equity markets decline, there is usually some bad news attached to it.\u00a0The first instinct is to extrapolate the bad news...\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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