Anticipating Market Corrections and Enduring Turbulence

Dear Friends,

The level of volatility in the Indian Markets over the past 3 months, from a Sensex peak of 30,000 plus has inevitably caught the attention of all investors. During this period, I have had several conversations with investors on what their strategy should be during market turbulence. Many investors were curious to know if there might be further steep corrections in the market and whether it is prudent to sell and reinvest at a later point in time. My recommendation to investors has been to stay the course and not try and time the market.

People who aim to time the market by selling and trying to reinvest after correction need to decide if their objective is to create long term wealth as investors or try and react to situations like traders. When you invest money in equity markets, one of the prerequisites is the time frame of your investment – if you do not have atleast a 5 year time frame, then Equity investments is not for you. Though investors do agree to this in principle and only then decide to take the plunge, over the period of investment, especially when their portfolio value plunges below their investment value, investors do get nervous.

This kind of behavior is quite normal and even I after 10 plus years of investment experience do feel apprehensive at times, when I see significant corrections and the markets plunging. It’s just that I have been used to this including the huge correction that we saw in 2008-09 when the Sensex plunged to below 9000 levels from a peak of 20,000/- plus which is a 50% plus correction. This might be a one of case which might not happen in another 20 years’ time frame where the Indian Growth story looks very promising. But over an investment horizon of 30+ years during the lifetime of an individual, multiple corrections of 10% plus and a few of 20% plus are very much possible and only the investors who have stayed through this turbulence would be amply rewarded.

When I set the return expectations of investors from Equity Mutual Funds at 16%, over the next 15 to 20 years, if the markets return 1.33% every month, then probably 75% of investors will definitely start investing in Equity. The journey of Equity Investments has never been smooth and full of turbulence and this is one of the key reasons attributed to the low level of retail participation, which is below 3%. Though markets have always rewarded investors with a long term outlook and the probability of losing money is almost Nil, over 5 years plus horizon in Equity MFs, the retail investor behavior has been such that they enter the markets when the markets are at peak and whenever they see corrections they tend to exit, booking loses. This is the reason why there are still a few people who keep saying that investing in equity markets is like gambling, ignoring the fact that the returns from Sensex since inception has been over 18% (including dividends) and Equity MFs over 22% (CRISIL MF Report)

So, as investors in Equity Mutual Funds what should be your approach?

I would certainly say that ignoring short term market noises and staying the course is one of the key traits to long term wealth creation. This is easier said than done with so much of information bombarding us through Television, Newspapers, Internet, Friends and relatives. But, you need to develop a behavioral pattern and condition yourself to ignore the noise and stay focused. And it’s the responsibility of professional financial advisors like us to guide you through turbulence and ensure that you reach your destination.

There are several articles on why there is concern on market performance in short term due to retrospective Minimum Alternative Tax (MAT) levied on Foreign Portfolio Investors, Quarterly Earnings of companies below expectations for a couple of more quarters, Increasing Crude Prices etc. which are all news that impact the markets in a negative manner. But the long term outlook for Indian Markets is intact, given our demographics, GDP growth etc. which everyone agrees and that is why India is looked at as one of the most attractive destinations for investments.

If you have surplus funds, then make use of corrections to increase your investments, consulting your financial advisors. Systematic Investments lay down a solid foundation for your long term wealth creation like the singles and twos of Cricket which are safe but you also need to clear boundaries to win matches and market corrections are good times to make lumpsum investments. 

I would like to conclude with 2 famous quotes:

“Stay the course. No matter what happens, stick to your program. I’ve said ‘stay the course’ a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.” – John Bogle

“In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine” – Benjamin Graham

Graham means that markets are Sentiment or Momentum Driven in Short Term and might not behave rationally but predictable and based on quantifiable financial metrics in Long Term – Markets are slaves of Corporate Earnings in Long Term and India’s Long Term Story is Intact.

Whenever you feel a little demotivated during period of turbulence, keep reading the above golden quotes from 2 of the most renowned experts in the field of Equity Markets and if you are still not convinced, have a conversation with your financial advisor as we exist to support you to tide over difficult times.

Another suggestion would be to not look at your portfolio on a daily or weekly basis and only to look at it once a quarter or 6 months time. With highly qualified and competent Fund Managers managing your Funds and Financial Advisors like us guiding you, you need to be confident that your money is in safe hands and just sit back and relax, ignoring all the short term noises in the market. There’s a lot of money to be made in Indian Markets 🙂

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