What investors do not understand is that the knowledge of stock market movement over the next few years is not important as long as they continue to invest through SIPs during market highs and lows. Data shows that the broad stock market indices always reward investors if they stayed invested for 8-10 years. The SIP strategy leads to automation of investment decisions (continue investing the same amount of money every month no matter what the investment return has been). It takes emotion out of investing. Widespread acceptance due to the combined efforts of many advisors and the media has ensured that the SIP has become an accepted norm by many investors. Around 30 million SIPs totalling to around Rs 8,200 crores of investment were invested in July 2019. The continued strong investments despite the volatility in the equity markets portends well for the future.
For the answer I gave to my client – any strategy for investment in equity necessarily must be long term in nature (8-10 years). Yes, there are the Warren Buffets who study a stock, then buy big and hold it forever. For lesser mortals, taking emotions out of investment helps.
As investors mature, they move on to other strategies that also take the emotion out of investing. Among the most popular in this category is the dynamic asset allocation strategy, which uses objective criteria to vary the amount of debt and equity investment. The objective criteria can be price-to-earnings ratio, price-to-book ratio, the difference in the yield between government securities and equity earnings, market-cap to gross domestic product ratio, or some such other parameter or a combination of parameters. The parameters or formula used is not that important. But it needs to be used consistently. Based on these criteria, the equity allocation is automatically reduced when stock markets are high and increased when they are low. The ‘buy cheap, sell dear’ strategy, in short, followed without emotion. Balanced advantage funds belong to this category.
In most versions of the VIP strategy, the SIP amount will be varied depending on an objective parameter such as returns obtained (lower or negative return results in higher investments and vice versa). It is not a very popular strategy, as it is much more difficult to stay the course during deep market corrections. It is your investment adviser’s task to keep you from making emotional decisions on investments.
Thanks to many such clients, I have mastered the art of answering the ‘Market nu su lagey che?
’ or what do you think of the market? I ask the horizon. If it is 8-10 years away, the current direction doesn’t matter. And if the tenure is less, my opinion
does not matter.
The writer is a Sebi-registered investment advisor