Sensex touched a new all time high today. The stock market has had a remarkable run since touching its low of 8900 in June 2006.
Needless to say, the last one-year or so has been quite eventful for investors in equity funds. If one were to analyze the behavior of investors during different phases of the stock market, there are lessons to be learnt for existing investors as well as for those who intend to make equity funds an integral part of their portfolio.
Market Ups & Downs
Every time the market goes up, many investors start wondering whether this is the right time to exit. In fact, there are investors who make the mistake of exiting too soon. It is important to remember that equities are a long-term investment vehicle and one needs to give one's money enough time in the market to get the best results. Remember, if one takes a wrong decision, there is always a risk of missing out on good rallies in the market or getting out too early thus missing out on potential gains.
Similarly, whenever the market turns volatile, it causes anxiety and in some cases, even sleepless nights. In times like these many investors abandon a carefully designed investment strategy as a knee jerk reaction and pay the price for it. Obviously, it is not be a smart thing to do. The key is to recognize that volatility exists in the market place and will remain so. After all, volatility is a statistical measure of the tendency of the markets to rise and fall. While volatility can be described as a natural phenomenon, there is a need for investors to develop ways to deal with it.
Invest Regularly
Though a lot has been written about systematic investing, it is often perceived as an option only for small investors. The fact of the matter is that systematic investing has nothing to do with the size of the investment. It is a way of disciplined investing that allows investors to invest in the stock market at different levels without having to worry about the market levels and the market movements in the short-term. Remember. When you opt for regular investing, you abandon any strategy that might control timing of your investments. In other words, you continue to invest irrespective of market conditions. This strategy works very well partly because of "averaging" and partly because in the long run markets move upwards, in spite of short-term falls.
It is not to say that one should not invest a lump sum amount in equity funds. For a long-term investors, making a lump sum investment is not an issue, however, a lump sum investment should not be the end of the story. Instead, it should be taken as a beginning of an investment programme to build wealth over time and needs to be followed by regular investments as and when investible surplus is available. Either which way, the key to successful equity investing is making investments on a regular basis.
Don't try to time the Markets
One often comes across investors who wait for months in anticipation of a correction in the markets. However, more often than not, they end up investing in a panic as the markets scale newer heights. At times, a small correction in the market seems like a great opportunity to them and as result they end up investing at much higher levels compared to the level prevalent at the time when they had originally planned to invest.
I am sure there are many investors who must be wondering whether they should be investing in the markets at the current levels or not. Though, the prospects of the markets look promising from the long-term point of view, it may be prudent for a new investor to adopt a strategy whereby a part is invested as a lump sum and the balance by way of systematic investing. The exact proportion of the lump sum and systematic investment would depend on one's risk profile and time horizon. This way, if the market drops right away, one would suffer a smaller loss and can buy more units each month at the lower prices.
Take help of a professional to determine the right levels for you. However, there are many investors who do not find regular investing very exciting. They also find the whole process a little cumbersome. It is important for investors to realize that investing in equity funds is not about excitement but a sensible way to build wealth through healthy real rate of returns. However, the key is to concentrate on selection and maintaining the disciplined way of investing.
It is often said that 90% of the investment success depends on the quality of the portfolio and the right mix of funds investing in different market caps and the remaining 10% on timing the investments. In reality, many investors spend 90% of their time "timing" their investments.
Now, a few words on the selection process. It is important to select the funds after careful deliberations especially keeping your risk profile, time horizon and investment objectives in mind. You will find some brokers constantly approaching you with new products. You need to learn to say "No" to products you don't really want or need. In other words, be wary of "buy now while the stocks last" sales pitch and always keep your long- term investment objectives in mind while building your portfolio.
The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at hemant.rustagi@moneycontrol.com
