Given the situation in the markets, several people are almost ready to give up on it. While a lot of what has happened in the last one month, is quite unexpected, I feel the problem has also been how people’s expectations have been tempered over equity.
Most planners and MF industry people have got majority of investors to understand that over the long run equity is the most likely asset to perform well. However, the corollary that they have implied of 12-15 % annualized return is where the problem starts. The data for our markets is only a few years old and it cannot be taken as representative enough to allow for meaningful projections into the future. If you just look into the composition of the Indices 10 years back and compare it to today, you will see how much has changed. The point is most investors have been led to believe that as long as they keep doing SIP in MF, over a long period of time this kind of return is in the bag.
The reason this has worked largely is that much of the current SIP portfolios ( including mine ) is post 2008. Since then the markets have not been great but they did not suffer any major downturn except for 2011. And then of course one had the spectacular returns of 2014 to seal the deal. The point is equity returns can be great but they will generally be quite unpredictable. Unless you understand this your strategies are likely to be flawed.
One reader of my blog asked whether we should forget equity then – of course not as that will be throwing away the baby with the bathwater. Equity is a great asset class that will deliver growth in the long term BUT you must stop looking at it like a FD with 12 to 15 % tax free interest. If that were the case then all people would put all their money in equity. The second issue is that we need to buy equity based on levels and not on some pre-determined time frequency. Obviously with an asset that can be volatile in pricing it makes a lot of sense to buy it when it is priced relatively low. Had you done so in 2015 then your SIP portfolio would probably be bleeding a little less now.
So what are the strategies in buying equity. I have explained it in several posts over the last 6 months but it will bear repetition:-
- Buy equity regularly but always based on levels not time.
- Do not have separate portfolios for separate goals.
- Have a solid foundation of debt which can cater to your goals if needed.
- Never do any distress selling in equities.
- Make sure your market coverage is good, do not listen to people who say 1-2 MF is enough.
- Do not mix equity and debt, makes no sense.
- It is ok to not buy for some time, waiting can be good for your financial health.
Having said all that 2016 will probably be a great year for buying equity if you have the courage to do so and can settle down for the long haul.