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.”