As the market situation continues to tumble from bad to worse, many investors who were confident of the long term market story are also getting the jitters. While I do think that personally the current fall is not much of an issue as I do not need to take money out of equity for the next 10 years, I can well understand that it may not be the case for many others. Over a small period of 1 month there has been a serious destruction of wealth for many retail investors and it may indeed take a long time for them to recover it.
Why is the situation different for retail investors today, when such ups and downs have always been part of the markets? Over the last few years the market returns have been good and this made the long term returns look rather optimistic. Many people who started investing in MF though the SIP route, were sucked into believing that a double digit market return over the long run was a given and even 15 % returns over a long term is quite possible. A lot of financial planning for important goals in life were done on this basis and is therefore now a problem in most cases.
Let us look at the Sensex returns over the different time periods till August 27th 2015. This data is from HDFC MF site and the returns if anything are actually much poorer now after the carnage of last week. All returns are in percentages.
- 15 year return on the Sensex is 12.61.
- 10 year return on the Sensex is 13.07.
- 7 year return on the Sensex is 9.06.
- 5 year return on the Sensex is 7.82.
If you had put your money in an ultra conservative debt product like the PPF, you would have done better in 7 years. However, it does not really work that way as you put money over a period of time and not just one time. To understand the real impact of the market fall, look at the reduction in your portfolio value for the equity portion. For me the reduction has been to the tune of 15 % and I do have a considerable equity portfolio, so even in absolute terms the drop is huge. I had suffered a similar experience in 2008, only the size of my portfolio was much smaller then. I would imagine that for most people investing through SIP in the last 7-10 years, the drop in portfolio value would be between 12 and 18 %.
Is this a passing phase? In other words, will the wealth that you have seemingly lost today come back? Yes, it will as the markets will recover over a period of time, the key question being when. However, this takes a serious toll on your portfolio as the growth goals you had assumed in your financial planning may undergo a serious change now. The extent of the impact is based on how long do you have till your goals and what types of goals these are. While, it will be difficult to address all possible situations, I will try to give some pointers to different categories of people.
If your goals are still a fair distance away, say at least 7 years or more you need to try the following:-
- Rejig your financial plan if you had taken 15 % or greater CAGR for equity growth. I would go fairly conservative and 12 % will be the maximum figure.
- Check your asset allocation now. For people with significant goals coming up in the next decade make sure that you have at least 40 % in Debt instruments.
- Your financial plan must be such that your goals can be met through debt instruments if that becomes necessary.
- Look at the possibility of targeted one time investments in MF, based on market situations. SIP does not really work well in a secular bull market and some of the current portfolio losses are a proof of that.
On the other hand if your goals are in the next couple of years, here is what you should be doing:-
- In case your goal was financial independence or early retirement, accept the fact that It will probably take more time than what you thought. Continue the current activities you are engaged in for earning active income till you reach a point where such a goal can be actualized.
- If your goal is mainly consumption oriented, that is you want to purchase an asset like a car/home or go on a vacation etc. you need to consider postponing the goal. Do not try to get this done by taking more loans than what you can afford, this will reduce your investment capability in a market where you do need to invest.
- For other goals that cannot be postponed, such as child’s college admission etc try to mobilize money from your debt portfolio to meet the current required cash flows. In case you cannot do that consider taking an Education loan with the understanding that you will pay it back quickly.
- If you do not have a significant debt portfolio start building it by transferring money from sources other than equity to this – for example if any insurance or ULIP policy is maturing then put the proceeds in some debt fund.
In general, the only immunity that you can have in a falling market is your ability of not needing money from your equity portfolio till the time the markets have had a sufficient chance to recover.I have no idea of how much time this will take but in my portfolio I can even wait for 10-15 years if need be, before I touch it for redemption.
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