Equity Investments have been an enigma for common Investors. Investors have always looked to unravel this puzzle. While some have succeeded, some have not. Let’s try and see the commonly held wisdom on how to ride the Markets successfully.
Let’s establish some facts first. In my opinion, 3 Most important facts related to Equities and other Asset Classes are:
- Equities have given the highest returns over a period of time. Equity as an asset class has outperformed other asset classes over the long term like Real Estate, Fixed Income products (Bank Deposits, Provident Fund, National Saving Certificates) etc. Please refer the below table from a Morgan Stanley study done some time back on the returns of various Asset classes over a period of time and their comparison with Inflation.
2. All Asset classes have volatility of returns. One thing that is certain is that Equity Markets will go up and down. Having said that, other asset classes also exhibit volatility of returns over a period of time. Real Estate and gold prices move up and down significantly. Even Bank FD interest rates go up and down over a period of time.
3. Impossible to time the Markets. If buying equities at the lowest price and selling at the highest price was easy, everybody would have been a Millionaire. Making money out of stock markets is one of the most difficult things in the world (I read that in a book, so must be true).
What should be our Investment Strategy for Equities?
This time I will talk about the 4 Most Important things. These would be:
- Use Equity investment expertise. Investing in Equities through Mutual Funds is the best option for common investors. If you are not the expert in financial markets then get one to do your job. A Mutual fund manager is the one to do that job. Common Investors with smaller investment corpus get the same allocation of Portfolio as Large Investors. There cannot be a bigger example of “Democratization of Investing”. Utilize the services of Financial Advisers / Mutual Fund platforms to decide on which funds to invest in. Never consulting experts or “I know everything” attitude would be “Penny wise, Pound Foolish”, in my humble opinion.
- Invest systematically in Equities. Since markets are volatile and it’s impossible to time the markets, invest in Equities systematically. There are tools like Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) which are available to solve the problem of timing the markets. Plus investments done over a period of time can help you in averaging out your cost of equity purchases (sometimes you buy high and sometimes you would buy low)
- Invest in Equities for the Long term: How long is the long term? Famous economist John Maynard Keynes’ quotation “In the long run we are all dead” probably does not answer that. However studies do indicate the long term, systematic investing does improve your chances of making profitable investments. As we can see in this study done by Crisil/Mint, the longer your SIP investment period, the probability of negative returns from the equity investments become smaller and smaller. In my opinion, run your SIPs for at least 5 years. Do not stop or pause your SIPs if the markets undergo correction. Do not panic, one would only be buying more units at a lower price when the markets are down
4. Asset Allocation is important: Do not keep all your eggs in the same basket. This cannot be more true for Investments. Do not invest all your money in a single asset class (not even equity). One needs to be prudent in allocating their investments across Equities, Real Estate, Fixed Income products and may be even gold (gold is fast losing its sheen as an investible asset class though). Again, one must not feel shy of seeking expert help for the right asset allocation.
While I end my note, I would also like to address one of the most frequent question that is asked of me these days. Markets are at an all-time high, what should I do? Should I wait for the markets to correct?
Let’s break this down.
First, to address the Market Highs. To this I would say, Markets make new highs over a period of time. Markets were at an all-time high in 1992, 1996, 2000, 2003, 2006, 2007, 2008, 2010, 2014, 2016, 2017 and 2018. If our economy continues to grow (which is widely accepted), there is no reason why markets would not make new highs every few years.
Second, should we wait for corrections? As I said earlier, it’s impossible to time the Markets. In the famous words of a world renowned investor Peter Lynch “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
I firmly believe this to be true. So one can use the strategies mentioned above
a.) Use Equity investment expertise
b.) Invest systematically in Equities
c.) Invest in Equities for the Long term and
d.) Asset Allocation is important
If you need to talk to an expert, call/Whatsapp +91 7337740002 and we’ll get back in a snap…