It’s like asking if it’s too late to get into a relationship. It depends on what stage of your life you are in. Just like when building a good relationship, you invest knowing your expectations – through the ups and downs.
Despite the recent falls, Sensex and Nifty may seem red hot. If you are making a debut in equities, you might be worried about catching the equity market on the way down and making big losses. However, don’t worry if you are in for the long haul – say 10 to 15 years. The power of compounding ensures you make decent inflation-beating returns, regardless of your time of entry.
Focus on Time in the Market
So, the first thumb rule is to try NOT to time the market. Rather focus on the time you are willing to spend in the market. The longer you stay invested, the lower the possibility of a loss in your investments.
There have been instances, where stock markets, really tested the patience level of investors. For the eight-year period (Nov 1993-Oct 2001), Sensex remained at about 2,900. However, what followed was a strong bull rally that took market to levels of 20,000 by end of 2007.
So, try to give more than 7-8 years to reap the full benefits of equities. Going ahead, one could expect to earn about 12% p.a. from investing in equities. If you have 3-5 years, for investment, which means you want less volatility and more security of capital, invest in good quality short term debt funds.
Look beyond the indices
Equity indices like the Sensex or Nifty are widely quoted in the media as a barometer of the Indian stock market. It is an index showing the combined stock movements of 30 or 50 stocks. However, there are more than 5,400 stocks listed on the Bombay Stock Exchange itself.
Successful investing is all about picking diversified stocks of companies with good fundamentals and a reasonable margin of safety. A strategy aligned to your long term goals will ensure you earn inflation-beating returns regardless of the ups and downs of the Sensex.
Smart Investors choose a diversified portfolio of equity funds based on their goals, apart from the historical performance of the funds. Moreover, by automating investments through SIPs you invest without worrying about catching market peaks or troughs.
Reduce the Noise
In the past, the world economy has suffered recessions. The Middle East saw multiple wars and resultant chaos. Oil prices touched $ 140 per barrel, increasing inflation across the world. Not the least, multiple scams rocked stock markets.
However, amidst all the bad news there were Indian companies that improved their earnings at a rapid pace - handsomely rewarding investors through greater stock price appreciation.
The Indian economy is growing at a faster rate than most economies in the world. Historically stock returns have been in line with earnings growth of companies, which is reflected in economic growth.
So, start looking at equity investments in a holistic way and don’t worry too much about the markets.