A reader aged 35 asks, “I have stopped all my equity MF investments due to the global recession and poor returns over the last few months. However, reading your articles, I am now in two minds. Can you please advise what I should do?”
The market zoomed up after the March 2020 crash much more than it fell. These over-reactions on either side are expected as a herd mentality governs the market in the short-term (next few years).
The grim consequences of the global lockdown are sinking in, and the market has lost steam. So at the very least, we should expect a sideways market for the next year or the next couple of years.
So does this mean we should stop our investments in equity and hold cash? No! On the contrary, this is the best time to invest and invest as much as possible provided:
- you don’t need the money for at least ten years or more (not more than 50-60% equity, though).
- For shorter needs, reduce equity allocation to below 40% and gradually reduce it.
- You have a strong cash base to tide over any difficulties due to job loss, inflation etc. This is not part of your emergency stash and can be anything from 1-3 years of annual expenses. If you are nursing EMIs, add 1-3 months’ worth of EMIs too! If you do not have this ready, try to accumulate this as quickly as you can without stopping equity investments (if possible). You can reduce the investment for a few months while accumulating this fortification.
Why is this the best time to invest? The secret behind successful stock market investing is to start early and keep investing. When the bumper returns arrive, your life could change. Mine did: Fourteen Years of Mutual Fund Investing: My Journey and lessons learned. Accumulate as much market-linked capital as possible to benefit from an upswing.
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Equity investing is like climbing an unknown, uneven staircase. We do not know how wide each step is, and we do not know when we will see the next step (ignoring the potholes within each step). This can be illustrated with a log graph of the Sensex. See Sensex at 50,000 – lessons from the 42-year journey, and Are you ready to climb the Sensex Staircase?!
So the stock market is like a mercurial batsman (e.g. Sehwag). It can explode to provide magical life-changing returns (e.g. from 2003 to 2008; 2020-2022) or can go through a slump for years (the Sensex was flat for ten years after the Harshad Mehta scam)
Many people believe such a thing will never happen again in India as it is now economically stronger. A majority govt is also a key driver of stock market gains. So if there is a hung assembly, the return over the next few years can be quite poor. In other words, there are no guarantees, and the future is unknown. See: the stock market always moves up in the long term, but returns move up and down!
So everyone is waiting for such a return in one way or another, and everyone is timing the market! See: Why “time in the market: is not different from “timing the market”!
However, there is a difference between waiting with hope and waiting with a plan independent. This is where goal-based investing and risk management makes the difference.
- Invest like a machine every month, regardless of market conditions, in a well-balanced portfolio.
- Plan on reducing equity allocation in a step-wise manner well before your deadline.
- Rebalance your portfolio as per this plan like a machine, regardless of market conditions.
- Stick to your planned investment schedule – e.g. increasing investments by 10% a year. Invest more if possible!
- You should know a reasonable estimate of your target corpus at any point.
- You should know the value of your accumulated corpus. How much is it worth relative to the target corpus? Focusing on this is much more important than portfolio returns.
In summary, do not stop your investments for long term goals. Instead of spending time on doomsday predictions, create a robust goal-based financial plan; implement it; stick to it. Bear the pain and invest in equity through loss, or you will never change your lifestyle!
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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