One of the most important points to note before embarking on the investing journey, especially in the equity markets, is that market movements must not make you emotionally weak and not bring any doubts to the mind about the objective of the investments.
The year 2018 tested the emotional and mental strength of investors, especially during September-November and the year is yet to get over. As an investor, if you had entered the equity markets in this period, the portfolio in most of the cases is in red. If you had entered the markets in the beginning of 2018, after witnessing a double-digit annualised return, the portfolio, again in majority of the cases is in red.
If you had started investing over 12 -18-24 months after witnessing a double-igit return, the portfolio’s annualised returns could either be in red or in single digit. And as an investor, if you were investing through the Systematic Investment Plans (SIPs) of mutual funds, again the portfolio returns is not something you would want to look at. Many would either think of stopping the SIP or have withdrawn the investments.
Hold on to your investments
So, given the negative returns all around in equity investment, if you are thinking of pulling out, my advice will be to not do anything in haste. The ‘emotional’ part in investing should be discarded and one must look into the reasons why one started investing in equities or through SIPs.
The 30-share BSE Sensex, after touching close to 39,000 levels in the end of August 2018, slipped to 33,200 levels in October. And at the end of November, the Sensex is again inching towards 36,200 levels. So, now those who had continued their SIPs had got more units allocated into their account and the portfolio returns have inched up. And if you had sold the holdings or discontinued your SIPs, it would be a different story.
One of the most important points to note before embarking on the investing journey, especially in the equity markets, is that market movements must not make you emotionally weak and not bring any doubts to the mind about the objective of the investments. That is why it is pertinent to have a investing horizon of over five years in equity. If the period is less than this, then equity is not the asset class you should invest.
Do not stop SIPs
Let me share a real case of an investor who initiated an SIP in early 2017 for `5,000 every month. Over the next 16 months till August this year, the SIP was generating annualised double digit returns. As the market returns went south in September and October this year, he stopped his SIP and withdrew the entire invested amount. He was not comfortable with the markets volatility and moved to fixed income instruments. This is not the end of the story. Seeing the healthy double-digit returns in his portfolio in 2017, he also started investing the surplus pension amount of his parents into equity SIPs in mid of 2018. Now these investments are in deep red. He simply redeemed the investments and stopped the SIPs.
Will he ever return to the equity funds? Probably not. That is why it is important that as we invest, we must also know what will be the action when the markets go down. It is the mental strength which is the most important factor to determine the growth in your wealth.
There are many cases where investors react in the same manner as the case above. The bottom line is—immaterial of the wealth or investing amount, the psychology of investing is same across investors of similar mental attributes.
Looking back, if you had invested in equity markets in 2007 or early 2008, the next one year the portfolio returns were negative of up to 60%. However, if you had stayed invested, based on the time horizon, the returns over the decade has been in double-digits, wiping out the negative returns in the past.
So, it is paramount that you invest with a process in mind and not take any kneejerk reaction to the short-term movements in the market.
The writer is managing partner,
BellWether Advisors LLP