30 January, 2012

Pulling money away from Equities now is a bad idea

The ruling sentiment now in the environment is of gloom. The stock markets have been on skids for over a year and people are wondering, if it will ever  go back to the levels seen in 2007 end. The negative returns are hurting and hurting bigtime. Sensex has given a negative 24% last year. So, lots of people are wondering why they invested in Equities and why they should care to keep the investments in equities, if even the capital is eroding.

Investors reckon that it makes better sense to invest in simple bank FDs itself, which atleast gives a positive return. There are flaws in this argument, though not apparent at first.

Firstly, volatility does not mean poor returns. As long as the amount stays invested, the profit or loss is virtual. It is when we cash out that the profit/loss becomes real.  So when the markets are in a tail-spin and subject to the fact that the investments are in the right places, it makes sense to stay put. There is no gain carping about the poor returns. It is well known that the stock markets goes through these whip-saw movements and deliver returns, over time. This volatility at this time is not new. Volatility is in the very nature of equity markets. When an investor has invested in equity markets, it is with that knowledge that they have invested.  One thing that should  be a source of comfort for investors is the fact that equity markets have given the best returns of any asset class, long-term.  Since 1980, Sensex has given a return of about 17% CAGR, to date. That is not too bad, is it?

The current favourite gold has given single digit returns in this period.  Gold reached an all-time high of about  USD850 an ounce in 1980 and had been sliding for most of the period after that, reaching about about USD271 in 2001. After that, it has been on a steady rise, till a few months back. There was a fall of over 20%, in dollar terms in the recent months, though the fall in rupee terms has been less drastic, thanks to a depreciating rupee.  Lots of people are betting on gold just looking at the past 10 years performance alone.  Property too has it’s own cycles. The bust which started in 1995 was in place till 2003. After that there had been a meteoric rise. But, so had the equity markets. But, equity markets rise and fall rapidly. And that, to come back to the point, unnerves people.  Sensex has risen from 100 to about 16,000+ now, which is not bad at all.

Investors should understand that equity will work in the longterm. You don’t have to keep seeing stock quotes everyday, just because it is published. Seeing the poor returns now and moving to debt would be shooting oneself in the leg, which unfortunately lots of people do. But, that smacks of lack of basic understanding of the equity markets. One would book losses, if one were to exit now and invest in another instrument, which could barely beat inflation. Poor choice. If one has patience, the same investment would eventually come up. Now, people wonder if it will ever come up. That’s laughable again. Equities are business ownership units. Businesses will be there and will make money – their revenues are always inflation adjusted ( they can increase prices ). So if you are participating in food businesses, you will make money. It is only the utter pessimist who would say everything will shut down and hence stock markets can’t go up at all. If that is the case what on earth can one do with gold and property?

Now, will the markets go down this year? Good question. But there is no conclusive answer. It can ofcourse, if the global situation worsens. It can fall by 20%, even a third perhaps. But that is in the realm of conjecture. The right question to ask is, will the markets come up and give good returns in future? The answer is a resounding yes. Hence, it makes sense to just stay put. If the markets go down further, 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 those same people will buy back when a bull rally reaches it’s peak – losing both ways.  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, as we have seen.

Just stay invested. Better still buy at all dips. You would have done yourself a big favour, doing that. You will realize that years from now!

Article by Suresh Sadagopan ;  Published in Business Standard on 22/01/2012

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