An Attempt To Answer Few Questions

We are experiencing unprecedented times of our life . There are so many questions running through the minds of investors in current situations.

This is just our attempt to answer to few questions .

Q) Is it a good time to buy equities / good time to enter into equities ?

Nobody can predict the market top or bottom exactly. We don’t know frankly whether markets have already bottomed out or would bottom out in next few months. But after such a sharp fall in prices, risk-reward is in favour .It is good to enter at these valuations . Sensex figure in itself has no value . It is just the number . What matters the valuation of underline businesses . The market would be expensive at 21000 in 2008 and would be reasonably valued in 2013 at the same level of 21000.  We are currently at the valuation where most of the macro factors give green signal to add equities like Marketcap to GDP , Price to book value , Price to earning . Now , the market may bounce back  ( which happened in last week where it rebounded by 20% from lows ) or may dip further or may remain range bound for relatively long period of time. It is totally based on the how investors respond to the information or misinformation .

However , the current valuation definitely build the strong possibility of making good returns in coming years .

Q) Should I stop the SIP ?

Stopping the SIP in such market defeats its main purpose of averaging . The SIP works on rupee cost averaging which work best in such cycle of market .  It allows investors to buy more units of a mutual fund when the market is low and reduce the per-unit cost of investment.  This discipline approach helps the investor to buy more units when prices are low and less when prices are high. And long term approach harness the power of compounding as well .

On should stop the SIP in current situations if

  • There is uncertainty over income of an investor
  • There is not enough contingency funds for next 1 year .

If an investor has steady income and can afford to continue the SIP in current times , then it is his/her favour . Discontinuing the SIP due to panic is more harmful than continuation in long term .

Q) Should I act now or should I have acted earlier or Should I exit to avoid further losses ?

Investors tend to only hear about “looming” market doom during such periods and “imminent” market growth during optimism.

This is the reason that Equities have been more volatile than other asset classes. The high volatility has often led investors to try and time the markets, by exiting and entering at their perceived opportunities.The chart signifies the importance of staying invested, as missed opportunities can significantly dent long term returns.

The above chart clearly shows that the best action is no action . Simply being patient and non action lead to more gain than getting into action on diversified portfolio of Sensex.

Although successful market timing may improve portfolio performance, it is very difficult for an investor to time the market consistently. In addition, unsuccessful market timing can lead to a significant opportunity loss. The chart shows comparison of annual returns and returns assuming the best month has been missed.

Good investing is not about making great decisions but about consistently not making mistakes. 

The graph also reveals that the history of volatility is quite common and it is very natural . This volatility is the one which helps equity to generate higher returns than other assets in long term . Volatility does not mean the market is broken or something is wrong . Here the challenge is to think , act and stay long term .

Thats why Warren Buffett nicely quoted Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”  

Q) When will market recover ? Will there be V or U shaped recovery ? What analyst is saying ?

The hard truth is that no one has any idea about this . No one ever knew earlier during past events and no one is going to know in future for any events . There is no doubt that this is unprecedented event in the last 100 years. It is Blackswan event . First time in history, world has a common enemy to defeat. The ultimate question to be asked is that “Whether this virus will wipe out the mankind?”  . 

If the answer is NO then businesses will come back . We will overcome this for sure as every top brain in the world is after solving this issue. So have faith .

That reminds Benjamin Graham quote

“Without a saving faith in the future, no one would ever invest at all. To be an investor , you must be a believer in a better tomorrow.”

Happy Investing & Stay Safe !!

Mythology & Money

During this unprecedented time and nationwide lockdown, one unexpected thing happened . Ramanand Sagar’s epic series ‘Ramayan’ returned back and getting aired on Doordarshan with the aim of keeping the country indoor which used to happen 33 yrs ago during the episode.

While catching the glimpse of series  , I came across an episode where Kaikeyi demanded the exile of Rama.

The brief story goes like this 

King Dasharatha, Rama’s father, decides to give his throne to his eldest son Rama . Everyone seemed very happy & pleased except Queen Kaikeyi – Rama’s step-mother, the king’s second wife. She wanted her son Bharata to rule the kingdom of Ayodhya . Because of an oath (Praan jaaye par vachan na jaaye’ sort of ) , Dasharatha  had made to her years before, she got the king to agree to exile Rama for fourteen years and to crown Bharata.

There are two lessons which i can relate to financial world from this part of Ramayana.

Importance of WILL & Trust : –

Human behaviour is unpredictable specially during emotions of fear , insecurity . You can see How Kaikeyi became insecure of loosing the status of Rajmata and about her son’s future .  Dasharatha  pleaded with her not to demand such a request but couldn’t stop her . She was scared that if Ram went to become King, Naturally Kaushalya ( Rama’s Mother ) would be Rajmata and she would be subordinate to her . This gave her lot of insecurity inspite  being an intelligent , loyal and she trusted Rama more than her own son Bharat .

Had there been a legal system at that time ,Dasharatha could have formed a trust and made Ram as main beneficiary .

But it is available in today’s time . It is very important , yet highly ignored & given least priority . Wealth Distribution is the 3rd pillar of Financial Planning after Wealth Protection and Wealth Creation . One can make a WILL or form a trust to avoid such unexpected surprises.  In fact, it is not always about dispute . It is important for the smooth transfer of the wealth to legal heirs or beneficiaries .

One can give a time to it now during this lockdown and prepare the handwritten will if not done earlier and then register it once life comes to normalcy.

Committing without thinking :-  

It’s Dasharatha’s commitment given to Kaikeyi which got him to this trouble . Same thing is observed in financial world . Lot of investors sign up for traditional insurance or unit linked insurance plan and commit huge premiums for long period of time without proper understanding of the investment products , thier future cash inflows , their cash outflows towards financial life goals . Any sort of sporadic cash inflow puts an investors into trouble as premiums have to be paid and one can’t exit the product easily as it comes with lock in conditions .The event like current one of global pandemic may create pressure on income . The person having low financial commitment can sail through this event without any emotional & financial burden.

Our Mythology gives lot of lessons on spirituality , life , management , behaviour & so on . However, there are many such lessons which one can relate to personal finance & money management and learn from it to make sound financial decisions in life

Happy Investing !!