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Persistence Dividend

Investing continuously through the boom and bust period is crucial for investors

For some weeks now, there hasn't been any shortage of people saying that fresh investments into equity mutual funds are stagnating. This is said to be surprising, especially at a time when the stock markets were continuously rising. However, I don't find this extraordinary at all. Enthusiasm for fresh investments in equity funds actually hasn't built up almost two years now.

The reason should be obvious-despite all the talk of how wonderful a year 2009 has been for investors, many of them have not yet recovered from the losses they suffered during 2008. The New Year cheer of the markets' near-doubling during 2009 has a forced ring to it. Those who invested during the second half of 2007 haven't quite managed to creep out of their losses.

If one looks at two year returns, it is obvious that a vast majority of equity funds are still in losses when compared to where they were at the beginning of 2008. Here are some numbers. Of the 225 diversified equity funds that were in operation over this period, a mere 25 are positive, and most of those are positive by negligible margins. There are about 10 funds that have gained at more than 3 per cent a year. A huge bulk of funds-about 140 out of 225, still find themselves more than 20 per cent lower than they were two years ago. As one can expect, the bottom of the list is populated by what used to be the hot funds of 2007, but whose hot stock-laden portfolio crashed the worst and never recovered. In theory, one would expect investors to be happy that they have gained back their losses.

However, that's the kind of attitude that's more common in the trader. Most savers' state of mind stays negative as long as the size of their kitty does not touch the previous high-water mark. That day hasn't come yet. Not just that, after a long and strong rally, the general opinion seems to be that 2010 will not be an easy year for making gains on the stock markets. What makes this problem worst for many investors is that during 2008, they stopped investing at some point. Now, many of them have missed out on the recovery and find themselves at the risk of their losses becoming permanent.

The deep and quick cycle that equities have gone through, have taught a vivid lesson in the value of continuous investing to anyone who is willing to learn it. No matter how you look at it, the right investing strategy would have been what it always is - to keep investing steadily regardless of market conditions. While this is counter-intuitive to follow, the last two years is all you should need to lay your intuition to rest. The only investors who are happy today are the ones who were steadily continuing with their SIPs when the Sensex was down in the dumps. However, what that means is that it would be just as bad to stop investing today because the experts seem to suggest that stocks are not going to do well in 2010. Experts have been wrong before-or didn't you notice?