Overview
Markets have surprised many Robin Hood investors since the start of the year 2021. The downturn started in October 2021 only, with a relief rally in the first half of January followed by a greater than 10% fall as of Feb end. There is much confusion in people’s minds, and most investors have been liquidating their investments, which were supposed to be for the long term. According to the AMFI data, the 3m average net inflows/outflows [1] of open-ended schemes has been trending downwards. This type of correction is happening for the first time post-Covid, and the new investors are simply not used to it. However, that does not mean we break our financial discipline. Unbelievably, discipline has been an edge in the investing journey since the birth of stock markets.
Well, let us start with the cliché – isn’t there always a reason to sell? This time around, there are aplenty – Russia-Ukraine war, Hawkish Fed stance, higher inflation, higher valuations and more. However, does that need to aff
Source: BSE Data as of latest available in the report
If your goal is near or approaching, you would already have shifted to lower volatility assets a while back. But, if you are still in the game for more than ten years, do you need to do anything except follow your investment plan while the market moves like it was supposed to?
Change your lens to see the market
Who said simple things like sticking to the plan is easy? What may help is to broaden one’s lens and zoom out to remind ourselves of the bigger picture. Let me show the chart of the Nifty 500 index (chosen as it covers more than 90% of the Indian stock market) plotted on two different timeframes.
Disclaimer/Source: niftyindices, Data as of 28-Feb-2007 to 28-Feb-2022
Which journey looks more comfortable to you? Of course, you will reach the same destination in both cases. However, if you watched your portfolio daily, wouldn’t it just make your journey more stressful? It is said, “When the going gets tough, the tough gets the going.” However, here, the “tough” are those who can control their urges of constantly monitoring their portfolios meant for the long term investing.
Is this correction unusual to the market behaviour?
We checked if the current drawdown (chart below) is deep enough that it might get challenging to manage one’s emotions.
Disclaimer/Source: niftyindices, Data as of 26-Nov-1998 to 28-Feb-2022
It is ubiquitous for markets to experience a correction like the current one (~10%). We did some historical analysis and found that Nifty 500 has fallen 16 times by more than 10% over its 22 years of journey. Hence, making any panic decision may unnecessarily hurt your long-term portfolio returns.
The most obvious solution is not that obvious
We had previously published a study (An age-old secret to wealth creation) that shows how a simple SIP strategy has outperformed the superpower-enabled ‘Buy the dip’ strategy over the long term. Buying the dip usually works better with assets in uptrends, where prices are making higher lows and higher highs. The SIP approach benefits from the power of compounding and rupee cost averaging. Let that sink in.
As seen in the chart below, if the perfect market timer could not outperform the simple SIP investor – what are the odds of irrational beings like us getting anywhere close to it?. So I ask again whether we really have any concrete reason to liquidate our investments and not just panic exit due to a market correction.
Disclaimer/Source: MOAMC Research, Data as of latest available in the report
The overlooked factors
Let us say you still decide to exit your investments. The bearing question is, ‘have you done the additional research of finding a better alternative asset class to park your capital?’ Is it going to sit idle and earn meagre cash-like returns? Due to redemption, the excess portfolio churn may also lead to additional tax liability and other payable overhead charges, which will cumulatively decrease the effective returns. Do we weigh these additional factors before making any withdrawal decision?
To conclude, if you are following your asset allocation properly, you always stay diversified and invested in all asset classes. You tend to make fewer silly mistakes as you already have exposure to the asset class doing well in times of volatility in equity markets. It eliminates the need to predict the near-term future direction of the markets and the risk of being in the wrong market at the wrong time.
Disclaimer: Sources- [1] AMFI. This article has been issued based on internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The stocks/sectors mentioned herein explain the concept and shall not be construed as investment advice to any party. The information/data alone is insufficient and should not be used to develop or implement any investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this article are as of date. The article does not warrant the completeness or accuracy of the information. It disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken based on this article. Mutual Fund Investments are subject to market risks; read all scheme related documents carefully
