I normally do not try to join issues with what is said in the social media, even if I happen to think that it is blatantly wrong. After all people who read such stuff are adults and they should be able to take responsibility for their own actions. If they are unable to distinguish between sensible and senseless postings then they only have themselves to blame.
Over the last few months however, I have noticed a trend of people advising several others as to what is a correct time frame for investing in equities. These are couched in a variety of ways but the general trend is like this:-
- You should invest in equity only for the long term, ideally 15 years or more and never less than 10 years.
- Any expense you are planning in the next 10 years or so must always be in lower risk debt instruments and even better in FD or RD.
- 3 years or so before your goal is reached, withdraw from equity and put all your money in safe debt funds or FD etc so that it is assured.
- Just saw an actual financial plan where the planner has asked the investor to put money in debt funds for his son’s education that is 10 years away.
Let me make it clear once and for all. There is NO substantive evidence that equity gives better returns only over the long term. Looking at data for our markets and trying to search for deep significance there is a joke as these are only 2 decades old with meaningful regulation. If we want to really understand the characteristics of equity as an asset class then we will need to look at global markets and understand how they have behaved over several decades. A little study of the same will reveal that:-
- Long term stagnation of the market is not uncommon, the most recent example being the Japanese markets.
- Over a longer time frame the volatility of returns get dampened but that is a probable occurrence and never a guarantee.
- Markets can give great returns over short periods like 3 years – witness our markets between 2013 and 2016. In fact sometimes even 4-5 months are enough, like we have seen in this year itself.
Based on this you should not have any hesitation in putting money in equity for any term really. Of course, you do not put all your money there – you need 3 portfolios of Debt, MF and Stocks. There can be several plans on how to do this but a simple one is as follows.
- PF and PPF / SSY will normally suffice for debt. Ideally PF is for retirement and PPF/SSY for providing cover to other goals such as children’s education etc.
- MF portfolio to cater for remaining retirement corpus and other goals.
- Stocks with any surplus available after above two.
When you need cash, simply see where does it make sense to take it out of. For example in 2008 or 2015 it would have made sense to withdraw from your PPF. Right now it is logical to redeem some MF units or stocks. Do not be rigid and think that each goal is mapped to some stocks or MF etc. Money does not have any linkages, important thing is the amount and the logic.
Change your investment philosophy and plan as above and you will see you are doing far better than whatever your present plan is. And, while you are at it, do not invest in MF through the SIP route, that is another thing which makes no sense at all !!