Uncertain markets: What should investors do?

The ruling sentiment everywhere right now is that of gloom. The stock markets have been skidding for over a year now (lost 25 per cent) and the negative returns are hurting investors big time.
People are now wondering if the markets are likely to go back to its peak of 21,000 levels any time soon. While some are regretting investing in equities, others are wondering if they should continue with their investments.

Therefore, most investors argue that it makes better sense to invest in simple bank fixed deposits, which guarantees positive returns. However, there are flaws in this argument though.Firstly, volatility does not mean poor returns. As long as the amount stays invested, the profit or loss is only notional. It is only when we cash out of the investment avenue that the profit or loss becomes real.

When the markets are in a tailspin and you have invested in the right stocks, it makes more sense to stay put. There is no point in complaining about the poor returns. As it is a well-known fact that the stock markets go through these volatile phases but do deliver returns, over time. So, the volatility that you are seeing now is not new and not for very long.

Volatility is in the very nature of equity markets. And when an investor invests in the markets, he/she is well aware about it. One thing that should be a source of comfort for investors is the fact that equity markets have given the best returns among any asset classes in the long term.

Since 1980 (Sensex's inception), Sensex has returned about 17 per cent compounded annual growth rate (CAGR). And that is not bad. Hence, investors should understand that equity works in the long term. You do not have to keep tracking stock quotes every day. Sensex has risen from 100, in 1980, to about 16,000 now.

At the same time, equity markets rise and fall rapidly. And that, to come back to the point, unnerves people. But, that does not mean that you move from equity to debt. It would be like shooting yourself in the leg by booking losses in equities, and investing in another instrument which is barely inflation proof.

Unfortunately, most investors do that. If one has the patience, the investment in equities will eventually turn around. But given the current mood in the markets, people are wondering if it will ever reach its highs again.

What one should keep in mind is that equities are business ownership units. Businesses will be there and will make money - their revenues are always inflation adjusted, that is, they can increase prices. It is a pessimist who would say everything will shut down and the markets will not perform.

By that measure, gold and property market can also meet the same fate. Other asset classes also have their cycles. For instance the current favourite gold has given single digit returns in the same period. But, investors seem to be comfortable with that. Gold reached an all-time high of about $850 an ounce in 1980 and had been sliding for most part of the period after that. It reached about $271 in 2001.

After that, it has been on a rise, till a few months back when the growth reversed. There was a fall of over 20 per cent in gold prices (in dollar terms) in the recent months, though the fall in rupee terms has been less drastic, due to domestic issues and a depreciating rupee.

Lots of people are betting on gold just looking at the past 10 years performance alone. Property, too, has its own cycles. The bust which started in 1995 was in place till 2003. After that there had been a meteoric rise. You may ask if the capital markets will go down again this year. But, there is no conclusive answer. It can if the global situation worsens. It can fall by about 20 per cent or even a third, perhaps. That now is in the realm of conjecture.

But in case you ask if the markets will come up and give good returns in the future? The answer is a resounding yes. Hence, it makes sense to just stay put and not jump in and out of equities. If the markets go down more from here on, you will not suffer losses as long as you stay invested. There will be those who will exit at the bottom. Let it not be you. And there will be those who will buy back when a bull rally reaches its peak.

These are the ones that loose out on both sides of the market movement. Still we have a hard time telling investors to just stay put. Some of them want to rejig the portfolios all the time, in the hope that it will miraculously recover. It just worsens the situation. Do not ever touch your portfolio in uncertain environment. Some others think of shedding loss making investments while retaining the better ones. Buy at dips instead of shedding or making any kind of changes to your portfolio. This will be a big favour for your investments and financial planning. You will realise that some years done the line.


Source: http://www.rediff.com/business/slide-show/slide-show-1-perfin-uncertain-markets-best-to-stay-put/20120124.htm
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