2012 OFFERS A LESSON FOR EVERY INVESTOR

  A year ago, experts said shun equities, but market surprised them with 20% gains. Bottomline: Don’t time markets, writes Madhu T 

 

 December 2011. A seasoned financial planner in Mumbai was impressed with his new client — a middle-level executive in an MNC. He was impressed with this woman on two counts. One, unlike many clients, she didn’t take forever to get back with details and filling the required forms. Two, she seemed to clearly understand what he was talking about. However, the planner doesn’t hold his client in high esteem anymore. “She called me last week and told me that she had not invested in equity last year as per our plan because she was convinced the market won’t deliver any returns in 2012. She said she has diligently followed market experts’ advice and was sure investing in equity would be a waste,” says the planner. “She decided to give stocks a miss in 2012 and invested all her money in various debt instruments. Now, she is interested in investing in stocks because the market has moved up so much this year. She wanted to know whether she can expect the same kind of returns in the coming year. Clearly, she hasn’t learnt her lesson from the previous year,” says the planner, a bit disappointed.
A PLEASANT SURPRISE 

So, what was the lesson the previous year offered to stock market investors? Don’t try to time the market. Last year, around this time, nobody had anything nice to say about the market. There were huge problems in the domestic and overseas economy and the government seemed least interested in coming up with any creative solutions. It’s the end of the India story, everyone chorused. And, yes, the market “surprised” them all. The BSE Sensex has gained 21% in the past year. “It is the usual story,” says Mukesh Dedhia, director, Ghalla & Bhansali Securities. “Everybody is either right or wrong. That is the practice in this business — nobody wants to stick his neck out. Every forecast is always in line with the general consensus. If you are proven wrong, like this year, you are in great company because almost everyone was wrong,” he says. “I tell my clients I am not an expert of the market. If you ask me where the Sensex will be in the next six months, I don’t know the answer,” says Suresh Sadagopan, principal planner, Ladder7 Financial Advisories. “I tell them that what we are trying to do is to identify various goals and find suitable investment vehicles to reach them. Sure, some of these investments won’t deliver the goods in a particular year or two, but that is part of the game. All markets won’t perform equally well all the time.” 

 
A PLAN FOR EVERYONE
Are you wondering why such obvious lesson is lost on so many smart people? “We Indians don’t have a strategy. We still haven’t learnt the art of dealing with greed and fear factors while investing, especially in stocks. All the lessons and conviction are lost whenever the market gets into a bull or bear phase,” says Dedhia. “That is why we have so many people getting into the market when it is nearing its peak. They will then complain that they have been short changed,” he says. Sadagopan says the habit of chasing “spectacular” returns is the main reason for such setbacks. “For example, I have seen that many extremely intelligent people have committed the mistake of staying away from the market last year when it was down and attractively valued. They were busy chasing gold and real estate or some such theme for spectacular returns,” he says. “Looking back, some of them feel that it hasn’t played out the way they had expected. Now, they are contemplating getting back to the market when the market has already moved up by more than 20%,” he says. 

Advisors like them would want investors to keep it simple to make money from the market. There is no secret formula for getting rich quick. All you need to do is follow the basic rules of the game, they say. If you are a salaried person looking to deploy money for long-term goals, all you need to do is to pick a diversified equity mutual fund scheme or two with a performance record of 10 years. If you want to diversify even within equity, you can go for a mix of large, small and mid-cap funds. Large-cap schemes should be the core of the portfolio, with small exposure to small and mid-cap schemes, which are riskier and have the potential to offer slightly superior returns in the long term. Review the performance of the schemes in six months and if you find them lagging consistently, find out the reasons for the lacklusture performance. If you think the schemes have lost steam, switch to another similar scheme with an equally long record. “All you have to do is to remember that you are in stocks to earn a little extra return, not spectacular return every year. Tax-free double digit returns. That’s all,” says Sadagopan. 

Source - The Economic Times - 17/12/2012