Investors often buy equity funds/stocks at high valuations and end up offloading them at abysmally low valuations. Here is a quick analysis of an investor who really screwed up timing the market but did a sensible job of not getting panicked and held the investments for 10 years.
Dot com burst in 2000:-
This investor invested 1 Cr in an Equity fund on 11th Feb 2000 when the Sensex was at 5933 (all time high). Sensex crashed by 56% over the next 1 ½ years after that during the dot com burst. The fund dropped by 40% during the same time. Exactly after 10 years, Sensex was up 173% and the fund was up by 824%, giving a CAGR of 25%. 1 Cr invested in 2000 was valued at 9.2 Cr in 2010.
Global financial crisis in 2008:-
This investor invested 1 Cr in the Equity fund on 11th Jan 2008 when the Sensex was at 20827 (all time high). Sensex crashed by 60% over the next 1 year after that. The fund dropped by 58% during the same time. Exactly after 8 years now, Sensex is at 24850 up by 19.3% (CAGR 2.2%) and the fund is up by 88.3% (CAGR 8.2%). 1 Cr invested in 2008 is valued at 1.88Cr. The return is equivalent to PPF
The returns would have been significantly better if the investor would have averaged the purchases at regular intervals through a systematic investment plan.
Sensex has corrected by 16% from the peak over the last one year.
Chinese devaluation of yuan has rattled stock markets across the world. So much so that the big bears are comparing the looming crisis to 2008 meltdown. The west is grappling with the deflation menace and everyone around the world is trying to evaluate the extent of plausible damage which China can do to the global economy. While the panic button is not yet pressed, the investors in India are already scared of adding more to equities after investing aggressively over the last two years.
So what should you do?
1) First of all don’t panic
2) If your portfolio is overweight equities, then stay put and do nothing
3) If you are underinvested in equities, this is the time to average your purchases
4) Keep investing smaller amounts (proportionate to the portfolio size) on every dip
5) Don’t stop your systematic investment plan. You can do a small top up instead
6) Keep a time horizon of 7 to 10 years. Markets have a tendency of reverting to mean, you just have to give enough time to your investments.
And lastly, don’t predict market levels; it is a futile game where no one can succeed.
A Chinese philosopher named Lao Tzu once said
“Those who predict don’t know, those who know don’t predict”.
It applies to stock markets too.