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In the past couple of weeks, the stock market has been highly volatile with a downward bias. With the Sensex closing just over 25,000 points on Friday, things don't look too bright. Whenever there's a big correction in the stock market, investors' minds go into a tizzy. They start wondering if they should sell and cash out before it's too late or should they buy more so that they don't miss out when the markets rebound? It's always painful to lose potential returns but it's even harder to see investments lose value.
Timing the market
Some investors would be tempted to find ways and means to time the market and make a quick buck. But will it work is the big question. The adjoining table (Returns Reckoner) contains real fund values of four large-cap schemes from different asset management companies. Assuming that an individual had put in Rs 10 lakh on August 1, 2005, the table shows value of the investment on during different market situations.
If someone wanted to time the market, he should have exited in January 2008 and re-entered in March 2009. But this realisation comes only on hindsight. In reality, everyone was euphoric and greedy for more during January 2008. No one thought of redemption. In March 2009 the feeling was of despair and fear. People either redeemed their investments or waited for it to turn positive.
Starting January 2010 the portfolios started returning to the valuations of January 2008. Some exited at this point, fearing a decline any time in future. In the next four years, there wasn't any major movement in the portfolio's valuations. And then, August 2014 onwards, there was a huge jump in the valuations which continued until recently. People who remained invested gained the most. How things will pan out from here on is anybody's guess.
The conclusion: it is difficult to predict how the markets will move, so timing it most often does not work. Rather it works only on a spreadsheet, in hindsight.
In 30s
All the above is from the perspective of numbers. The portfolio, goal and situation of the actual investors differ. Take the example of Rajan, 30, who has a one-year old son. He and his spouse both are earning good salaries and have stable jobs. He has a small amount of savings. Most of their income goes towards expenses and repaying of loans. For him this market turbulence could be a great opportunity to make investments in equity. His major life goals - education for his son and retirement - are far away. He has the capacity to stay invested during turbulent times. Once he has his risks covered, by maintaining sufficient emergency fund and opting for health and life insurance plans, he can put a major chunk of his money into equities for the long term.
In 40s
Ganesh is 45 and his spouse is a home maker. Their daughter is 12. He has been an aggressive investor and likes to invest in stocks. He is preparing for a major transition in life, from being a salaried individual to an entrepreneur. Looking at this change, he should ideally have at least two-three years worth of expenses available in a liquid fund, apart from the regular emergency fund, and health and life insurance cover. The biggest challenge for Ganesh would be to overcome his aggressive investing profile in the face of his near term goals. If he decides to invest his entire surplus into the equity market now, he may have to defer his entrepreneurial venture in case he faces a major loss in the upcoming months. His need right now is to create a big liquid corpus and only then look at equity investing. Any erosion in wealth now could also impact the funding for his daughter's higher education in a few years from now.
Just retired
Pranay, 61, retired last year. His spouse, 57, has a stable job. His primary income now is from investment returns and rentals. He has been a conservative investor all his life. Traditional thinking would suggest that Pranay put most of his investments in fixed income instruments as he is retired. This thinking will ignore a big risk in his portfolio - reduction in purchasing power due to inflation. He will fall short of income in a few years if he has an only fixed income portfolio.
For the next three years, their basic expenses will be met from his wife's salary. Pranay can invest 75 per cent of his corpus in long term fixed income instruments. These will give stable income. The balance 25 per cent can be put in equity. When there is a shortfall in income from debt, he can start dipping into his equity investments. In the initial few years he will need to withdraw very small amounts from equity. By the time he needs big amounts, his equity portfolio would have grown sufficiently big to support him for the remaining years of his life. He also has the option to liquidate his property investment, in case there is a need to supplement income.
For him, this could be a good opportunity to top-up his equity corpus as most of his current income is surplus. Pranay might feel uncomfortable in case of sharp declines in his equity portfolio. But he has stable income for the next eight to 10 years, which will not be impacted by any market movement. This can give him the grit required to stay put in this volatile phase.
More than understanding the market behaviour, it is important for an investor to focus on his own situation and his tendency to behave in a certain manner when markets correct. Investors can make progress only if they are able to focus on what is important to them and what is in their control. The way market behaves is way beyond an individual's control.
The writer is director, Dhanayush Capital Advisors
