In recent weeks, international markets have been at historic lows. The Nikkei 225 slumped to a 26-year low; Dow Jones hit a 12-year low; Nasdaq, a six-year low. Not to be left behind, the Sensex too, hit a three-year low.
In such market conditions, you might question the oft repeated principle of 'equity for the long-term', but there is sound logic and statistical backing that shows that this principle still holds true. Wealth tries to answer simple yet frequently asked questions that may be in your mind today.
I entered the market when Sensex was at its peak at 21,000 level. Will it ever return to that level?
To find the answer, let us go back a little in time.
Remember the Ketan Parekh scam in 2000? The Sensex was riding at 6150 level when the news of the scam broke. Immediately after that, the Sensex dropped to 2924 level, which is a whopping 58 per cent fall. In less than four years (in 2004), Sensex reached 6250 level again, a 53 per cent rise. Historically the Sensex has been through highs and lows. So, there’s no saying that the Sensex won’t reach 21,000 level again, after all, we are talking about a 50 per cent rise.
Financial advisor, Kartik Jhaveri says, “It’s a cycle. Peaks have been taken out in the subsequent rally. Even if you had invested at the peak this time, you can expect a 12 to 15 per cent returns per annum if you stay invested for the long-term.”
The magic word here is 'long-term'. Financial advisor Gaurav Mashruwala says, “Anything beyond seven years is considered long-term.”
Some trend spotting supports this. If you had invested in the BSE Sensex for any one-year period between 1979 and 2009, in 11 out of those 29 years, you would have lost money (see table). However, if luck was in your favour, you would have made 25 per cent gains for that one year.
But look at the probability of loss. If you had invested in any year (between 1979 and 2009) and stayed invested for more than 10 years, your chances of loss would be almost zero. And that too, you would have made an average return of 17 per cent per annum. The longer you stay invested, the lower your chances of loss. In fact, if you had stayed invested for more than 15 or 20 years, your probability of loss would have been zero. At the same time, the average return would be at 16 per cent, which would beat inflation and also remain tax free.
(Note: March 31 values of Sensex have been considered)
This cycle is basically a reflection of the economy. And experts do believe that the Indian economy will bounce back in a couple of years, on the back of a strong domestic revival.
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How could I have minimised the risk while investing at the peak?
Of course, while investing when the markets were at 21000 nobody knew if there would be a further upside or a downside. It was a chance everybody was taking. The best way to beat chance and minimise risk is by not putting your money in lumpsum but doing a systematic investment plan (SIP) in mutual funds. Financial advisor, PV Subramanyam says, “SIP in a mutual fund should help you get high returns while saving you from volatility in the markets."
I am investing in equity for my retirement which is 15 years away. What happens if the market hits a historic low in the year I am due to retire?
Revisit the basic fundamental of financial planning, that is goal setting. If you are planning for your retirement, you would obviously have a target sum in mind, of say Rs 1 crore or Rs 50 lakh (which is arrived at with reasonable assumption of future returns). You must exit from the equity market as soon as your sum is achieved, even if it is slightly before 15 years. The key is not to succumb to greed and try to stay invested for higher returns.
Subramanyam advices, "A systematic withdrawal plan is a good option. When you have achieved your target for the year, you can withdraw some amount for the year. You can decide to sell 20 per cent of your portfolio in a year.”
Investing fundas
Subramanyam suggests some general fundas of investing:
1. Your investment must be based on your financial objective, time horizon and risk tolerance. So, jot down your objective, be it saving money for studying abroad, for your child’s marriage or that palatial house in an exotic location.
2. Buy only two to three companies’ stocks a year, if you are serious about creating wealth for yourself. However, before buying, research around 30 to 40 companies.
3. Investing is research. ‘Buying’ and ‘selling’ are trading. So, learn about the share you buy.
4. Do not compound one mistake (of buying high) with a second one (of selling low).
5. Stay invested in an index fund. It usually gives you good returns.
6. Like Warren Buffet said “to be the first there, you should first be there’. Survivorship is fundamental to winning.
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