Impact of markets on your portfolio

Yesterday the markets closed at the lowest levels in about 20 months or so. In fact, the levels of Nifty were similar to that of May 2014, just after the Modi government came into power. For a while everything had looked good and it was estimated that the markets would be at Nifty levels between 8500 and 9000 by 2015 end. My own expectations were along similar lines but, as it often happens in the market, things have gone fairly wrong.

If one looks at it from a fundamental angle, it is not really surprising that we are doing badly. There has been a lot of promise but not much actual delivery. Whether it is the issue of black money, GST, land acquisition or anything else it is the same story everywhere. For some time the markets were on steroids with hope but seeing the IIP numbers, exports decline and stagnant corporate earning quarter after quarter has clearly taken it’s toll. Add to it the fact that FII money has seen a strong outflow due to a variety of reasons, this now makes it easy to understand why the markets are doing so badly.

While ups and downs are always part of the equity markets and one will have to deal with them, I am a little worried about the casual approach that some people have taken to this.The general feeling propagated is that one is in equity for 10-15 years or even more, so how does it matter what is happening now. Again, when you deal in some of the forum in social media, you get to hear a lot of silly things but this one really takes the cake. Let me explain to you what is the real impact of current markets on a typical portfolio in detail.

Well, firstly there is no guarantee that every investor has 15 years or more with him and, even if he did, that the market will improve spectacularly in that period. Secondly, there are people who have their goals coming up soon and the current cuts definitely have a rather harmful effect on them. I have dealt with the strategies they should really follow in my last post. Thirdly many people who do not understand basics are thrilled that they are getting a bargain price on equities, without thinking what is the impact on the overall portfolio that they have.

Take an example of an investor who has been investing since 2003 and check how his portfolio would have got affected in this period. Yes, you can call this hindsight but this will show you what has happened in real life:-

  • 2003 to 2007 the markets were largely in a bull phase and his SIP investments would have done ok. Let us assume he built up a portfolio of 100 units by December 2007 and his investment each year was 10 units.
  • In 2008 the market crashed and even though it recovered quite well in 2009, the years 2008 through 2013 were largely not bullish, rather sideways. The investor’s original portfolio in 2008 Jan would have reduced to 60 units ( 40 % cut is ok, my own portfolio had more ).
  • By Jan 2014 his 60 units would probably have grown to 90 units assuming a CAGR of 7 %, which probably is overstating it.
  • Assuming he continued his SIP at 10 units per year, he put in 60 units and they would probably grow to 75 units by Jan 2014.
  • So in effect his portfolio in Jan 2014 was 165 units ( 90 + 75 ). In the run up of the market from 6000 to 9000 in Nifty let us assume his portfolio had gone up to 250 units. For simplicity I am not looking into SIP for 2014 and 2015, as those will in any case be at a loss now.
  • Assuming that he has not redeemed his portfolio, in the fall of Nifty from 9000 to 7400 the portfolio has probably got reduced to 200 units now.

So in effect between 2003 and 2015, he has invested a total of 120 units and is having a portfolio of 200 units. Not so hot and it will be worse if Nifty goes down to 7000 etc.

A brutal cut in the market is disastrous for your long term portfolio. Only new investors starting off stand to gain but long term investors are going to be hurt badly. Now think of someone who wanted to retire with 100 units in Jan 2008 or with 250 units in Jan 2016 and you will get the complete picture.

Only 2 ways to deal with it. First is to implement the 3 portfolio strategy with a strong foundation of debt and second is to forget SIP and keep buying equity at the low points of the market. Follow these two rules and you’ll be better off when the next brutal cut comes along.

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4 thoughts on “Impact of markets on your portfolio

  1. Hi Sir. So, I’m getting a feel that a common man cannot dream big with equity vehicle. Fixed income or low risk investment options are the way to go for not so bright future and still able to meet the future needs. Insights?

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    • No Nithin, equity is important but without a foundation of debt, your portfolio will be shaky. So the point is to build a good foundation of debt and then look at equity. Otherwise the risks with only equity is simply too much for an investor who does not have a huge amount of money.

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  2. I never gave much importance to debt but realise it’s equally important when equity fails. As far as buying low is concerned I hope buying at ema levels is sufficient , though it requires a bit more effort than normal sip

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