Since touching levels of 23,005 in February 2016, the Sensex has delivered a 40% absolute return and an annualised return over 25% till now. Many of the large-cap and mid-cap stocks have delivered returns more than the Sensex during the same period.
Since touching levels of 23,005 in February 2016, the Sensex has delivered a 40% absolute return and an annualised return over 25% till now. Many of the large-cap and mid-cap stocks have delivered returns more than the Sensex during the same period. In the same vein, for the conservatives who would want to look at a larger time frame, the Sensex after touching the levels of 30,000 in January 2015, has delivered an absolute return of only 10.5%, or an annualised return of less than 4%. So, what does the above statistics reveal? An investor with an aggressive and equity-oriented approach, would advocate a strategy of holding on and buying more into the market anticipating the Sensex to reach higher levels.
A conservative, volatility-averse (not risk-averse) investor would look at encashing the gains and sitting at the sidelines, anticipating a correction and buy into the correction. Well, both the approaches involve forecasting. And forecasting more often leads to disappointment. As compared to forecasting, the more recommended approach is to have a process framework and an Investment Policy Statement (IPS), which guides in the Investment journey irrespective of market movements and volatility.
But this is the most difficult part. Today, information not only flows, there is a deluge. To choose the right information is a task by itself. Today, the approach is more of a reaction, as compared to planned process of investing. And we have no one to blame but ourselves. Our mental conditioning in many instances is too weak and we prefer the reactive approach.
We can look at history to check if there are periods when the markets only went in one direction for a long time, albeit with minor corrections. In April 2003, the Sensex was at around levels of 2960 and in January 2008, it touched a high of 21,000, before sliding to levels of 8891 in February 2009. Are the current market levels reflective of the levels of 2003? There will be temptation all around to buy or sell on news and tips. Many of us succumb to it as greed takes over which leads to suboptimal returns.
At the other end of the extreme behaviour, are those investors waiting in the sidelines anticipating the indices to go south. And as it may or may not happen, the case of missed opportunities and heartbreak comes over. And this is where the cardinal sin is committed – investing at the peak as emotions take over and not reason.
The movement of equity markets cannot be predicted. Demonetisation was supposed to have a negative effecr. But then it turned out to be different. To move with the trend is the approach. It is important to have the IPS in place which will outline asset allocation, time horizon and liquidity needs. It should also outline actions to be executed when the market moves in any direction based on the individual portfolio needs. Always remember the golden rule: The markets should not control you, it should be the other way round. With process, the market and its movements will not effect you and instead you will be in control.
The author is managing partner, BellWether Advisors LLP.