A couple of months ago, I'd written how many investors had mismanaged their SIPs by stopping them when the markets crashed in 2008 and then restarting them only after the markets had gone up again after May 2009. These investors had followed the basic instinct of investing only when the markets are exciting and, in the process, done the exact opposite of what should be done. This pattern is quite widespread. A good number of SIPs get cancelled when NAVs keep dropping.
Now, given the number of dark clouds that are gathering overhead, we could well be in for some troubled times for stock prices. The worrisome part is that the stage could be set for individual investors to repeat the mistakes they made with SIPs last time around.
Fear in the financial system To be fair, given the nightmare of 2008, even seasoned investors have become prone to panicking. We saw this with great vividness on Thursday night last week. For a brief 40 minutes or so, it was like being transported back to the horror of October 2008. The US markets were falling faster than ever before, on the international news channels and perfectly reasonable people were casually talking of banks being afraid to lend to each other.
In that short while, I think a lot of people realised how much fear remains in the financial world. Whether we could still be on the edge or not is debatable, it is clear that a lot of people think that we are, and that's really the same thing. Anyhow, my point is that if the behaviour of professional investors can so easily be driven by fear of another crash, then so can the behaviour of individual investors be.
However, if you go around stopping investments and SIP plans in response to declining markets, then that could be quite damaging to your financial health.
Keep investing
The whole point of SIPs is that you must keep investing when markets decline. The only reason that SIPs are better than one-shot or sporadic investments is that they make you invest during the down phases of the markets. From a long-term perspective, the more frequent and deeper the crashes, the better it is for SIP investors. The basic mantra of investing is to Buy Low and Sell High and that's what SIPs are designed to do. Provided, and this is the key, you keep investing when the markets decline.
It is highly likely -- though by no means certain -- that your equities portfolio (both stocks and equity mutual funds) are going to suffer substantial declines in the coming weeks. However, investors can use this to their advantage if they have learnt the right lesson from the last time around. And that right lesson is that for long-term investors, the best kind of stock markets is one with a general upwards direction combined with regular declines. There can be little doubt about the general upward direction of the Indian stock markets. And one can rely on episodes like this Greek tragedy to supply the regular decline.
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