"October - this is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February." So said Mark Twain.
Most retail investors seem to have taken Mark Twain's wisdom for gospel. What else can explain the complete lack of interest in stocks? One of the reasons retail investors attribute their disinterest in equities to is the fact that they have not got any returns in the past five to six years. While this is true to some extent, equity as an asset class is volatile and you should be invested only if you can stomach the volatility. Volatility unnerves a lot of people. They do not see the secular uptrend in equity returns over time, which in fact is the most important consideration.
Investors cannot just focus on the past five to six years alone. Equities have given amazing returns overtime. Sensex has given 14.7 per cent compounded annual growth over 10 years, but has offered only 4 per cent plus returns since 2008 (data as on 7 May 2014 and for the preceding years from thereon). Past five-year returns have been 13.2 per cent CAGR. These are point-to-point returns and they can vary widely based on the timing of the investment. Nifty has given a 10-year return of 13.8 per cent, five-year return of 13 per cent plus and 4.5 per cent since 2008.
The point-to-point returns shown assume that one has invested at these points in the past, as a lump sum. When that happens, the investment returns vary widely based investment timing.
The magic of regular investments
Regular small investments, say on a monthly basis, beautifully takes care of the timing problem. When one invests on a monthly basis the timing problem is eliminated - for the investment goes on autopilot and the investment gets done irrespective of what the investor feels, since the mandate is already given. Giving a mandate to invest every month seems like a dangerous strategy as our "common sense" tells us that we need to invest when it is low, to make money.
But that "common sense"would not allow us to invest when the market is low, as we feel it can go lower. It will also stop us from investing when the markets have risen as we start comparing with the previous lower levels (levels at which we did not invest, thinking it will go down further). Due to this behavioural aspect, most of us are unable to invest at the right time and make money.
But, does consistently investing at all levels, make money? Let us examine by taking two large-cap funds - ICICI Pru Top 100 and HDFC Top 200 Fund.
Let us assume that Systematic Investment Plans (SIPs) have been started from April 2000 in both these funds. Look at the returns.
Now, this fund is not an exception. Most other reasonably good funds in which one would have done SIPs would deliver some similar returns. The returns are a factor of the regular investment process. Let us take another example.
ICICI Top 100 fund is another large-cap fund which has delivered 13.46 per cent and 14.56 per cent CAGR returns for five and 10 years tenures, respectively. Since April 2008, it has delivered 14.13 per cent CAGR returns as opposed to the point-to-point returns of 4.5 per cent of Nifty. Since April 2000, it has delivered 18.2 per cent CAGR returns.
Let us analyse the data in another way. Let us see what happens if SIPs were stopped in different years.
Many investors started SIPs when the stock markets started going up. Let us say an investor started a SIP on April 1, 2005 and continued for four years, that is till April 1, 2009. After this the investor stopped the SIP, but held on to the investment till March 31, 2014.
The XIRR (Annualised Internal Rate of Return) in this case is 14.83 per cent and the value of Rs 10,000 per month for four years would yield Rs 6.5 lakh. However, if the SIP had been continued for the entire tenure, the value of the investment would be Rs 21.5 lakh and the XIRR would be 14.1 per cent. This simply shows the power of SIP. A 14 per cent plus annualised return post-tax in either scenario, is truly amazing, considering the turbulence in the last six years.
Even if an investor has started the SIP, getting the timing all wrong, that is, on April 1, 2007 and kept investing till March 1, 2008 ( for just one year) - in short, the time before the crash - and held on to the investment till March 31 2014, he would get a 10.42 per cent XIRR. That's not bad at all considering the terrible timing. Now, if the same investor had invested from April 1, 2007, till March 31, 2014, he would get an XIRR of 12.4 per cent.
Investing through SIP mode is truly a great source of wealth creation which saves you the trouble of getting the timing right. Here, volatility can actually work in your favour. You will not feel the pain of investing, as the amounts invested every month is small. What's more, it offers excellent post-tax returns.
Stopping SIP due to market swings would be a dumb thing to do. In fact, we can turn Mark Twain's wisdom on it's head and safely say that if you invest over the years in all months from October to September, the danger vanishes from stock investing.