After touching the 30,000 mark in March, the BSE Sensex has been on a roller-coaster ride. The benchmark index is now down over 14% from its peak, losing as much as 1,625 points on a single day on August 24.
Global factors such as depreciation of yuan, talks of US Fed hiking rates and the collapse in commodity prices worldwide have affected the Indian markets as well. The current volatility has made investors wary about their investments. However, past data show that Indian markets have recovered after sharp corrections. Actually, a stock price could move over 10% irrespective of the fact that the company’s fundamentals are strong or not.
Let’s look at some data points for days of sharp Sensex declines.
* May 18, 2004 — The single largest fall of 11.14%
* May 18, 2006 — fell 6.76%
* Jan 21, 2008 — down 7.41%
* August 24, 2015 — fell 5.94%
Despite such sharp one-day corrections, the Sensex actually delivered more than three times the return between 2004 and 2008 and the markets have rewarded those who have stayed invested. Also, between 2013 and early 2015, long periods of inactivity and intermittent periods of hyper activity have contributed to the wealth journey of the investors.
Investors must keep in mind the golden rule that investing is a process which must have a goal, a time horizon and asset allocation in place. If you haven’t already done this, this is a good time to initiate the process. This will ensure that the investments are based on a process and not on market behaviour. Also, one needs to understand the difference between technicals and fundamentals. If you are in for the long haul, fundamentals are the key and technicals do not matter much.
However, if making money on ‘price movements’ is what you are looking at, then do not blame market volatility and do not confuse this with ‘investing’.
Investing based on technicals qualify ones as a ‘trader’ and not as an ’investor’.
In the last decade, the wealth created by equities benchmarked to Sensex is over 17%.
In other words, R1 lakh invested in 2005 grew to R5 lakh, or five times the absolute return. This was achieved despite the corrections in 2006, 2008 and 2013.
As volatility in the Indian markets will continue because of global factors, an investor must take account his investment cycle and horizon and stay the course for over five years to ensure higher returns.
The writer is founder and managing partner of BellWether Advisors LLP