this appeared last week in MoneyControl….

Investment in turbulent times!

The market has gone nowhere in the past 4 years. When your financial planner / relationship manager / advisor told you that equities are for the long run he/she also said ‘long run’ means more than one year, correct? Well you invested when the index was 20000 and after that the market has just gone down. First it went all the way to 9000 and then it came up to 20000, but now is at 17000.

Far more importantly the shares that you bought and the mutual funds in which you invested have fallen by almost 40%.

Your advisor has started some other business, and is now not taking your calls. Your wife is screaming at you for putting HER money into direct equity – and she is not able to withdraw it for her sister’s wedding. She had promised her dad she would pay Rs. 100,000 for the same, but the shares are worth only Rs. 62,000! You are at your wits end.

What is to be done?

Just go back in time. Rewind to Diwali 2005. All the bulls including die-hard bulls said the market would have done great if it ended Diwali of 2006 at the same index as Diwali 2005. No expert was willing to brave even a 9000 call.

What actually happened? Just go back to your older files, and refresh. The market made these bulls look ordinary. January, February, March…. the markets cross 11,000 then April sees 12,000. Then, we celebrated. We made 12,000 stickers and stuck it all over the place. We made T-shirts, mugs and celebrated 12,000.

We assumed that the market is a place where there is no downward risk!

Let us rewind even further, say 1993 to 1999. The year 1993 was perhaps the worst year in the equity market and was a virtual bloodbath. Markets lost 46% in the financial year ending March, 1993. The returns for the years from 1993 to 1999 are as follows:

-46, +65, -13, 3, 0, 15, and -3.

An arithmetic mean is 3 of these numbers is 3. So we assume that if you had put Rs 10,000 in 1993, you would have got back 10,300 in the year 1999, correct?

Well let us see what would have actually happened:
1993 you would have got  -46  and your corpus would have reached Rs. 5400.
1994  ——-do—————-65 —–do———————————–8910
1995 ———do——            -13 ———-do—————————-7751
1996 ————-do——–     3 —————-do——————— 7984
1997——————-d0 —- 0 % ———–do————————–7984
1998 ———-d0————–15%—-do———————————9181
1999   you would have got     -3% and your corpus would have reached     8906

Over the years this is what would have happened to your Rs. 10,000 – now include 2% amc charges…and that would be even worse 🙂

Well it would have been worth Rs. 8906, and not 10,300.

The year 2000 was a good year and gave a return of 33% – so yes you would have RECOVERED your capital. In the national savings certificate it would have doubled.

The key takeaway, ‘The market will do what the market will do. You have to do what you have to do’.
Markets will be volatile. You will see a sensex of 15,000, 18000, 20000 and even perhaps 25,000 in a 12-month period. As a rule everybody loves a bull market. So the FM, the SEBI Chairman and everyone else will look worried and will try to talk up the market.
Keep in mind – for 3 years we have believed that markets cannot come down, and interest rates cannot go up. That might be about to change. We believed that a 2-day fall would be followed by a rise. We believed that the market is fairly valued at 3000, 5000, 8000, 10000 and 12000. We may rethink. We believed that you could go to the terminal in the morning and come back richer at the end of the day with Rs 5,000 or Rs 50,000 simply by buying. The bigger you bet, the greater was the gain. We may rethink on that. We believed that we could build our own portfolio and save the asset management charges that mutual funds charged. We may rethink on that.

The lessons are very simple.
1.    Asset prices fluctuate and they are inversely related to the interest rates. Markets are but an asset class. If it goes up, it will come down.
2.    Individual investors will come, conquer, panic and leave. FIIs will do similar things. You need to act sane. Nothing changes in the economic situation. The solution lies in having an investor mindset rather than a trader mindset.
3.    If you have money for the long run (I mean 4-5 years at least) you should be in the market. If you need to pay your EMI by selling shares, you should be praying in a temple.
4.    If you have an advisor who says 1 year is long term, get another adviser. If your CA says 1 year is long term – he means the Income tax act, not the equity markets.
5.    If you think you understand arithmetic mean, please go back and learn geometric mean, harmonic mean, standard deviation, median and mode.
6.    Equity markets have returned about 22% over long periods of time – with reinvestment of dividend, but please note all calculations ignore taxes and fund management costs. If you include that the final result is not so rosy.
7.    It can take the market say 10 years to touch the previous high. In markets like Japan, it only made new lows!
8.    Be patient do a SIP in a good big fund from a good fund house. If you are worried about fund manager risk, just put it in an index.

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1. ##### R.Manivannan

Subra Sir,
What is your opinion on Balanced fund.On paper its operation principles seems very sound.Do they deliver.
wr
Mani

2. ##### SAM

Subra,

Great post as usual. You could add one more point – Investors need to develop a good stomach too!

3. ##### jagbir

very informative post.
>> If you need to pay your EMI by selling shares, you should be praying in a temple.
any option for an atheist? 😛
I was planning to get some money from Equity to fund purchasing a piece of land but now due to ‘entry’ situation instead of ‘exit’, looking for other possible options.

4. ##### Dev

I still remember watching CNBC TV18 when the markets touched 18K for the first time.
I was at my wits end to see Mitali Mukherjee (A beautiful anchor) crying when Sensex touched 18K! They had all sort of stupid stuffs like coffee mugs (As Subra Sir rightly points out) with a tagline “18 till I die”