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Stay The Course

Despite the turmoil in the markets, equity will still give the best returns in the long run...

Looking at what is happening in the world around us, it is but natural for an investor to panic. It does not appear that all will be well soon. I have invested in the equity market via equity mutual funds and am very worried. Will I end up losing my money? Will funds be able to pay dividends? If it's going to be downhill from here, then maybe I should just pull my money out from equity and get into debt - at least the interest rates are high right now and it seems more safer?
-- Avideep G

We have been getting a lot of mails such as yours and I can well understand what you are saying. In fact, our cover story this time tackles this very issue. Do take the time to read it.

s normal
Those who wrote in seem extremely surprised and shocked at the market turmoil. While the world is a riskier place post 2008, such turbulence in the stock market is not new. It is part and parcel of an equity investor's life.
Equity returns are not normally distributed, they exhibit "fat tails". Fat-tailed distribution is a probability distribution that exhibits large skewness. What this means is that equity investing experiences far more large gains and large losses than would be expected under a normal distribution. In fact, the frequency of such turbulent times is why investors demand a high equity risk premium. Equity is the one asset class that gives the best returns over others in the long run, despite such market upheavals.
The trick to success in equity investing is to be able to stick to your guns when the market is in the doldrums. When it picks up - and it eventually will - you will stand rewarded. In fact, the CEO of a fund house was telling me that they have been getting calls from their high net-worth investors (HNIs) asking them if this is the right time to increase exposure to equity or should they wait for the market to further pull back.
When you invest in stocks, you are investing in the business of that company. So it will take years for your capital to appreciate. Meanwhile there will be jerks and sudden market movements that will hurt. That does not mean you pull out your money and run away.
If you pull out your money now, you are doing so on the assumption that the market is not going to rise for a long time. No one can predict what the market will do in the coming weeks or coming months. When the market bounced back in March 2009 it caught most people off guard. And during the 2007 rally no one would have predicted the messy times of 2008. Investors must be aware of their limited ability to forecast market movements.
While I am not saying that the market is going to bounce back immediately, it may even drop further, what I am saying is that investors will not make money by running away every time there is turmoil in the market. If you want to make money in the stock market, you must be willing to ride the rocky patches.

into alternate investments
You say that you are worried about getting dividends from your schemes. I hope you do not depend on equity schemes to augment your income. If you are looking at some sort of income flow, then equity is not the right avenue. To address your other point, it's all very well saying that it is safer to get into debt, but then your returns will be severely dented. If you opt for a bank fixed deposit, the interest is taxed and the return will not be all that high when you take inflation into account.
If you have a systematic investment plan (SIP), continue. Do not sell your equity holdings unless you desperately need the money. Remember this was exactly what investors went through in 2008. Investors who sold their stocks at times when there have been very large declines in the market have invariably been wrong. Any fund manager will tell you that the average investor tends to put money into the market at/near the top and tends to sell during periods of extreme decline and volatility. Going with your emotions always backfires and leads to sub-standard returns or losing capital.
Stay the course. It will pay off in the long run. And don't forget that stock markets are always risky and such events or crisis are normal.

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