In today’s volatile environment which largely stems from economic uncertainties from global markets, be it the Yuan devaluation some time back or Brazil being downgraded to junk or the September Fed meet on which everyone had an eye which resulted in no rate hike at the moment. The thing which most investors lose focus on is something that is called as long term investment perspective. By investing for the long term one will not try to time the market. Nobody can. We all know the simple rule of investment – buy at low and sell at high but invariably we tend to do it the other way round.
While focusing on short term we tend to buy stocks which have all the positive news around it and little do we realize the half of the time that news has already been priced in. If we focus on the short term our investments are bound to react to events in the short term both positive and negative. Whereas if we focus on the long term the returns will be impacted less by volatility and more by the performance of the investment instrument.
As per tax laws holding stocks beyond one year is categorized as long term but when it comes to investment an investment horizon of 3 – 4 years or more can be considered as long term. On the other hand when it comes to real estate it is far beyond that. Gold is another asset class but again it depends in which form it is held, whether in physical form as ornaments or in the form of ETFs.
Historical data also shows SENSEX had jumped 250% from April 1991 to March 1992 on the back of Harshad Mehta scam. He took crores of rupees from the banking system and pumped it in the market. The scam came to light when the State Bank of India reported a shortfall in government securities. That led to an investigation which later showed that Mehta had manipulated around Rs 3,500 crore in the system. On August 6, 1992, after the scam was exposed, the markets crashed by 72 percent leading to one of the biggest fall and a bearish phase that lasted for two years.
Similarly, from April 1999 to March 2000 SENSEX rallied 35% on the back of improving macroeconomic scenario – improved GDP numbers from growth in manufacturing, infrastructure and construction sector, falling inflation, healthy forex reserves and good industrial production numbers as against the year before and also the technology bubble was engulfing the rest of the world.
Again SENSEX fell 27% in March 2001 when the Ketan Parekh scam took place. A chartered accountant by training, Parekh came from a family of brokers, which helped him create a trading ring of his own. Be it investment firms, mostly controlled by promoters of listed companies, overseas corporate bodies or cooperative banks, all were ready to hand the money to Parekh, which he used to rig up stock prices by making his interest apparent.
Again in Feb 2008 SENSEX corrected by 8% approx on the day Reliance power Ltd. got listed. It closed 17% below its cost. Sensex witnessed a fall of approx 36% from 2008 to 2009 on the back of US Subprime crisis.
Following that there was a sharp pull back in equities between March 2009 to November 2010 led by global (Quantitative Easing announcement by US) and domestic (general elections) news flow. Putting all the pieces together the message to take away is that events will keep on happening but if one keeps a long term investment horizon it will be a safer bet.
The two main factors to consider before taking an investment decision for one self are ability and willingness. It is very important to know the difference between the two. Willingness is more about the attitude towards risk irrespective of the financial ability to do so. Ability on the other hand is financial capacity to bear the risk. It depends on income of the individual, his savings and expense pattern. It depends on the amount of money which one can keep aside purely for investment and not dip into it time and again for personal needs and can hold on to it even if they are not doing good at a particular point in time.
But again the point to note here is that if a particular investment is consistently a poor performer, one should plan an exit from the same and reinvest it in another suitable option. If one is not very good at deciding which stock to invest in and what the best time to do so is, then there are professionally managed mutual funds with different investment objectives from which one can choose.
Source: Citi Research, HDFC MF, Colored rows refer to yearly data; other represent quarterly data
Source: MSCI, Credit Suisse, I/B/E/S, FactSet, J.P. Morgan Economics, J.P. Morgan Asset Management “Guide to the Markets – Asia.”
Source: Bloomberg, HDFC MF
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