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The key is 'time in' the market, not 'timing' the market

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Praveen Gurwani
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Markets will rise and fall but by investing at regular intervals you'll be able to make sure that you get the benefits of buying low as well as catch the long term trend which is upwards.

‘Investing in the stock market is one of the most risky avenues to park your savings’. ‘Stock markets deliver the highest returns amongst all asset classes’. All of us know people who would swear by any one of the above two statements. In fact most of us can be grouped into two categories based on the above statements. Now it’s not possible for a group of people so highly opinionated to be fundamentally wrong and yet both the arguments can be debated at length.

Equity risks can work for you in the long term: If you are one of those who’s a firm believer of the first statement ,we would like to bring to your attention how you as an investor can make the risk of investing in equity markets work for you in the long term. Most people would define ‘risk’ with some technical jargon that sounds very pseudo intellectual and very embarrassing to question without sounding too dumb. ‘Risk’ for you and me is nothing but volatility in markets returns. The more the volatility the more the risk and there is no other asset class which can be as risky as stocks. Equity investing is inherently risky and most people burn their fingers and swear off the markets until its time for the markets to correct again.

But it is this very volatility which can be made to work in your favour by following a few basic tenets of equity investing and consequently shift your opinion in favour of the second statement!

Stay away from equities if your time frame is below one year: First and foremost if you are one of those people who invest for a period which can be counted in units of time lesser than a year, we stand to advice that clearly equities should not be made a part of your asset allocation since you do not have time by your side. But if you are saving up for an event which you foresee in the distant future, nothing will make that event more enjoyable than allocating a sizeable portion of your portfolio into equity.

The prices of stocks in the markets by their very nature represent the discounted future earnings of the companies they represent. Without getting too technical, all you need to understand is that as long as the companies these markets represent are growing, their earnings will grow and that will in turn result in the prices of these companies in the stock market growing. This is what will happen in the broader (longer) market horizon.

The trick is not in buying at highs and selling at lows but investing regularly: The intermediate term will involve a whole lot of prices running ahead of their earnings and then trotting way behind them. If we could time these price differences to our advantages then we would all be multi millionaires 10 times over, but that is an illusion which we live in. The trick is not in buying at highs and selling at lows, but buying when you are building your portfolio towards your distant future event (retirement, BMW, whatever…) and selling when you need the money to fund your event.

Its as simple as that, markets will always rise as a long term trend, with a sprinkling of highs and lows along the way. In this kind of approach, we do not make use of the highs and lows to enter since we continue to buy at all times on a fixed periodic basis. Using this approach we will buy at regular intervals which will make sure that we get the benefits of buying low as well as catch the long term trend which is upwards.

Do not time the market, but save towards your future event: Since we cannot time the markets (as we have not planned to) by buying low and selling high we are not faced with the question how high is the peak and how low is the bottom. We are buying because we need to save towards a future event which needs saving for, and we will sell because, well, the event has come and we now need the money.

Following these basic principles and having a very disciplined approach to the regularity of investing and the asset allocation decision as well as regular portfolio review, we are confidant that equity investments will allow you to come out a winner.

I will now attempt to show the kind of returns a person would make by investing in equity using a very simple investment tool available today known as the Systematic Investment Plan. Think of this as a Recurring Deposit with a bank which you are never to touch other than on the happening of an event we are saving towards.

We have a very interesting statistic prepared by Pru ICICI with reference to their own scheme which shows us the advantage of regular SIP investing. A point to point return by one of their fund namely Pru ICICI Power Fund from its peak during the year 2000, i.e. March 7, 2000 to the NAV closest to the peak NAV after the crash in the markets during the year 2000, i.e. December 18, 2003 is a measly 0.14%. While a SIP made from March 2000 to December 2003 had returned 47.52%. This gives you a fair idea of what the equity markets can do to your investments if you follow a disciplined approach to equity investment.

Systematic investment works on the principle of Rupee Cost Averaging which essentially means that given the same Rupee investment, when NAV prices of mutual funds are high a systematic investor buys less of them, and they purchase more when prices are lower.

Systematic investors have no regard to market timing and are adding the same Rupee amount on a regular long term basis with the idea of accumulating additional mutual funds units. A regular investment program may actually help turn the ups and downs of the market to your advantage. That's because you'll purchase more shares when the fund's price is low and fewer shares when the price is high. But it is important to remember that this kind of a plan does not assure a profit or protect against a loss.

For most of us it may seem that retirement is a lifetime away, but it’s important to remember that the earlier you start getting your savings organized towards your long term goals the easier it’s going to be to reach your goals. Just to put things in perspective a person who starts investing a fixed amount every year from the age of 25 till 35 (i.e. 10 years) will have a bigger corpus than someone who invests the same amount from the age of 35 onwards till his retirement at 65 (i.e. 30 years) given the same rate of return.

Time is of paramount importance and your strongest ally in wealth creation. Also given that you have a longer time horizon, you can allocate more towards risky and hence more rewarding assets in your asset allocation and reap higher returns.

Given the high volatility one is seeing in the Indian equity markets today after a long spell of easy returns, its become more apparent to the retail investor that its very easy to get badly burnt in this markets unless you have a dynamic financial plan in place, and then sticking with it irrespective of market movements. Having a financial plan is the first step towards a financially secure future. A few hours of research on the internet would help you get your plan started or else you could look for professional help for the same from your investment advisor.

The Tipping Point is a financial advisory firm based in Fort, Mumbai. The author, Aditya Apte is a Chartered Accountant and has completed LLB (Gen). He can be reached at [email address]


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