When it comes to investing, one of the factors which cloud an individual’s decision making skill is one’s own emotional bias. A Systematic Investment Plan (SIP) is the most advocated means to circumvent this. What a SIP does is that it regulates one’s investment into mutual funds without the individual taking a conscious move to invest. In short, the investment goes on, on an auto-pilot mode.
But there are times when the investors are jolted out of this well-set arrangement. It typically happens when the markets are either rallying or correcting sharply. In case of a market rally, greed comes in and investors look to increase their equity allocation and if the markets are in a correction mode, investors in a bid to protect their investments from the downfall tend to either discontinue SIPs or redeem their investment, irrespective of the fact whether the financial goal for which the investment was being made is achieved or not.
It is a well-known and understood fact that timing the market is next to impossible but investors invariably end up making an investment decision based on their intuition rather than financial prudence. As a result, not only does one loses the opportunity to create long term wealth but may also end up missing one’s financial goals.
Make the most of market situations
Recently, Value Research an independent mutual fund research house did an analysis taking into consideration Sensex returns since 1980. In the said time there were a plethora of negative incidents which affected the market from time-to-time. Some of the major ones would-be assassination of key political leaders, major financial scandals, financial crisis (Dot Com Bubble, Sub Prime Crisis), terrorist attacks, natural disasters (Earthquake, Tsunami), commodity crash to name a few. So, what would have been the return scenario if an investor decided to stay invested through all these years?
The analysis shows that across market phases, Sensex generated a return of at least 10.3% over a three-year timeframe, 10.5% in five years and 14.7% over 10 years, irrespective of the time you have entered since 1980. Now if one would have decided to purchase after the market corrected for 10% in the said timeframe, the returns would have been 15.7% in three years, 12.2% in five years and 16.8% in 10-years. Conversely, if the same purchase was made after the market rallied 10%, the return profile would be 7.9% in three years, 9.7% over five years and 13.2% in 10-years. Please note: All the figures here are in CAGR terms.
The above numbers clearly show that buying during the downtime in the market can prove to be beneficial for a long-term and a patient investor. However, investors tend to do the reverse and miss out on the favourable opportunities presented by the market. The lesson to be learnt from these numbers would be: It pays to be a patient investor.
Positive investment experience
Now, coming to the next point; the chances of making a negative return. For a retail investor, the biggest put-off when reviewing one’s portfolio is looking at negative returns. Even though it may be temporary, it is the investments that are in negative that tend to capture our collective attention immediately. This is where time spent in the market becomes important.
Now for those investors, who had initiated investments into a diversified equity fund at the market peak of 2007, 60% of the funds in this category had moved into the green at the end of two years and at the end of four years, 99% of the investors would make gains. This clearly shows that even if one ends up investing at a market peak, one need not worry if they are in the market for a long haul.
To sum up, staying invested through the negative times in the stock market is bound to yield positive investment experience over the long run. Then again investments are made keeping in view a financial goal; so investors need not clampdown during market corrections or volatile times. Instead, if possible under the guidance of a financial advisor an investor should look forward to such opportunities to increase the quantum of investors during such phases such that one gets to accumulate more units.
