The new 'five-year' Plan

Many investors are beginning to lose their patience with stocks, and equity mutual funds. It’s not surprising. Equity investors have been buffeted by harsh winds on all sides for the past few years. An improbable confluence of unseemly global and local factors have tested every bull’s resolve.

Along with investors, advisors are in a quandary. All along, they have been glibly telling clients “stocks are a great investment if you have a five year horizon” and supplementing it with data and charts of the BSE Sensex which corroborate this statement. Investors have also been told “You cannot lose money over this horizon if you undertake an SIP”. Many investors have been influenced by such talk and have commenced SIPs in 2007, only to find that the tale is not going according to the script. For the record, the five-year return of the Sensex is 3.24 per cent per annum. The media is also having a field day, with various articles about how the Sensex has underperformed fixed income instruments.

Advisors are being incessantly questioned about the reasons for this apparent debacle. So what could advisors say in their defense?

Here are a few pointers:

• ‘Mea Culpa’: If you have actually held out that equity is a five-year product, it is best to admit you are guilty. This may actually soothe a belligerent client bent on confrontation. It will also condition you to choose your words with greater care in the future.

  It is prudent not to speak about equity investing in terms of ‘Bright Lines’ with respect to time horizons. There is an element of vagueness and uncertainty inherent in equity investing. It is, therefore, preferable to speak in terms in terms of time ranges rather than specific points in time. 

Equity returns are lumpy: It is very important to stress on the concept of ‘compound annual rate of growth’ (CAGR) while explaining equities. Equity returns are not linear. They will oscillate wildly. It may help the cause of advisors if they underline that volatility of returns will reduce with the passage of time. This is not the same as saying that clients will earn great returns over any fixed period of time. 
 

Do you need the money today? Let us assume your clients have understood the concept of CAGR and have invested in equities to achieve financial goals which will crystallise several years from now, If they are getting jittery today, reinforce the concept of how the volatility of returns will reduce over longer periods and how today’s market prices are immaterial, considering that they do not require the money today. Also, for those clients who want to jettison equities and use the proceeds to purchase debt instruments and gold, reinforce the virtues of an optimum asset allocation. 
 

SIP investing has been helpful: While some clients might have suffered losses, in most cases, a systematic investment plan (SIP) has proved to be useful. Apart from the monetary returns, the ‘auto pilot’ feature of SIPs liberates the client from being glued to the market and enables them to undertake other productive work. This advantage alone should not only motivate clients to continue their SIPs but also renew these whenever they are due. Of course, the onus of choosing appropriate schemes lies with advisors.