Markets highs or lows: Stick to your goals and asset allocation – Here is why

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Published: January 31, 2018 2:57:42 AM

The equity markets in the last three months have been on fire. The Sensex’s movement in 2017 from levels of 31000 on May 27, 2017 to levels above 36000 on January 23, 2018 has left more investors disappointed than happy.

market risks, what to do while investing in market, tips for investorsThe government’s demonetisation drive in late 2016 had made many investors worry about the markets.

The equity markets in the last three months have been on fire. The Sensex’s movement in 2017 from levels of 31000 on May 27, 2017 to levels above 36000 on January 23, 2018 has left more investors disappointed than happy. The government’s demonetisation drive in late 2016 had made many investors worry about the markets. And the more than 20% move in Sensex over the last eight months has left investors baffled, especially those waiting on the sidelines to invest. With every rise in the indices, it looked like a ‘missed’ opportunity. But is it a ‘missed’ opportunity or the lack of ‘strategy’ and planning? At the same time, inflows in mutual fund schemes are only rising with every passing month. This can also be attributed to the TINA (There Is No Alternative) effect. With the asset class of gold, real estate and debt not generating returns, the masses and the classes have jumped on the equity ride.

So is the market moving up too fast? Is it a cause of worry?

Earnings matter

One thing for sure is that the stock price over a period of time reflects the earnings. The 3 Es that matter are earnings, earnings and earnings. And the earnings growth is still not being reflected in the prices in majority of the cases. The price of a stock or a share does move ahead of its earnings, majority of the times, in anticipation.

So, does the market have more steam left to touch bigger highs?

An investor many a times looks at the stock or the prices from his/ her perspective. The way and manner in which he looks at the stock determines the outlook and that outlook may not be the appropriate outlook. This is where a process and checklist is required. Another point to note is that when investors are still cautious, does it mean that the markets have not reached the euphoric stage? Well, the business of forecasting is best left to the others. What we can do is to control what we can and for those which are beyond the control, we try to manage them through individual processes and checklists.

When in doubt, look at data

In times of doubt and also at all times, data is the element which needs to be looked at. Let us begin with 2007 and see how an investor would have fared in his investing journey over the last 10-11 years. The BSE Sensex was at 14,000 levels and, say, an investor started a SIP of `10,000 per month in a large cap equity mutual fund. The Sensex touched the then high of 21000 in a year’s time. And again, within a year’s time, on March 2, 2009, the Sensex was at 8500 levels—at 1/3rd level of the all-time high. The investor continued with his SIP and did not stop his disciplined investments.

As of January 2018, after a good 11 years of continuous disciplined investment and after having noted his initial capital being reduced to 60% in less than 24 months, the corpus is Rs 33.86 lakh on an investment of Rs 13.30 lakh, an annualised return close to 16%. Drawdowns in excess of 10% was noticed in the portfolio eight times (in a 11-year investing journey ) and drawdown in excess of 20% on three different occasions. And more importantly, noticed in the first 24 months. Nerves of steel and belief in the process and time horizon was required. So, we can learn from history and ensure that the same mistakes are not repeated. Can we?

At the same time our investor had also invested a lumpsum amount of Rs 1 lakh in a large cap mutual fund. After 11 years, it has grown to Rs 4.44 lakh with annualised return of close to 14.5%—a growth of more than four times over 11 years. So, remember the golden rule: Always have a goal and asset allocation in place as an integral part of the investing journey. And always keep your investments simple.

The writer is managing partner, BellWether Advisors LLP

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