The widely announced death of investing principles, which I wrote about recently, has turned out to be heavily exaggerated. As a matter of fact, not only are these basic principles alive and well, following them is the only way for investors to take advantage of the crash/panic/downturn/recession/depression, or whatever people are calling it today.
For a long-term non-professional investor who'd like to keep things simple and invest through mutual funds, the events of the last year-and-a-half have proven to be a heaven-sent opportunities to make money. That's right-the crash of the investments markets will eventually add to your profits. I'm not saying here that eventually the markets will recover and you will make good your losses. I'm saying that if you are the kind of person who sensibly invests through a long-term Systematic Investment Plan, then the size of your nest egg will increase because of this crash.
You may not have believed this back in October 2008, but with the investment markets showing some signs of resilience, you will probably find yourself easier to convince. To see what I mean, let's do a thought experiment. Let's imagine an investor who has been making investments regularly for the last ten years through an SIP and see how he actually did and compare that with how he would have done had the stock market crash of 2000 not taken place. Let's assume that this investor started putting in Rs 10,000 a month into a fund that tracks the BSE Sensex in January 1999. By now his investments would be worth Rs 25.7 lakh. Now, consider what would have happened had the crash of 2000 not taken place. The BSE Sensex collapsed from a high of around 6100 in February 2000 to a low of 2846 in October 2002. It eventually recovered and crossed the old high in January 2004. Let's examine a hypothetical situation where it didn't crash and instead stayed flat at 6100 from February 2000 to January 2004.
In this crash-less history, our investments would be worth Rs 20 lakh today instead of the Rs 25.7 lakh that they actually are. Our investments are worth an extra 25 per cent because stocks crashed in 2000. For an SIP investor who keeps investing regardless of whether the markets are up or down, low prices and crashes are a heaven-sent opportunity to make investments at a low point. Today, we are in the middle of exactly the same phenomenon. While market crashes are an investment opportunity for everyone, you just have to switch on any business channel to understand why a more active investor is not able to exploit such opportunities. The talking heads on TV are perpetually talking about whether its time to invest yet and about whether the market has finally 'made a bottom'. Those who listened to them and started looking for bottoms have wasted the entire trough waiting for evidence of whether it was time to buy or not. The stock markets are up about 30 per cent from their lowest point and I think history is being repeated.
Those who kept their faith in the basic principles of good investing have been able to use the crash to invest at low levels; others have just waited for the right opportunity. Just about the worse off are those who terminated their SIP plans when the markets crashed. In an effort to optimise their investments, they've pessimised them.
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