In the medium to long-term, only the local economy matters. And a systematic investment strategy will be the right one for the for the foreseeable future
27-Aug-2015 •Dhirendra Kumar
On Monday, most of the financial markets of the world appeared to go crazy. The big name Indian indices, the Sensex and the Nifty, dropped by almost six per cent in a few hours, far more than a savings account earns in a year's time. Over the next three days, the world's markets have gyrated up and down wildly, but haven't yet come close to success in wiping out the losses of Monday. The Chinese markets haven't even tried, declining each day. Except for brief periods when Beijing has tried hamfisted interventions to prop up stock prices, they have declined almost continuously since June and are now down 40 per cent over the period.
Even though predictions of an impending crash in China are old hat now, this week saw continuing bad news from China combine with fears of an interest rate hike in the US, and a commodity crash that would damage many emerging markets . It all adds up to an apparently satisfactory set of reasons, and as far as the requirements of the news cycle go, they were.
And yet, when one thinks deeply, there's something amiss in the reasoning. The magnitude of the collapse in huge companies, as well as in companies that may have nothing to do with these actual reasons was eye-popping. In the US, General Electric and JPMorgan were down by close to 20 per cent for a while. In India, the likes of ICICI Bank lost 10 per cent of their value. The first explanation is panic, and indeed that was probably a huge factor but clearly, the scale of the panics nowadays are much larger than they used to be. The reason is that investors constantly feel stretched, and know that stock prices around the world are generally inflated on the strength of tall tales and cheap money. Rightly or wrongly, they are like liars who live in constant fear of being found out.
So what should investors do? Given what I have described above, the answer is surprisingly simple. We should choose a handful of equity funds with good long-term track records and keep investing steadily through SIPs. And not to stop doing so during crashes. The whole point of investing steadily in a mutual fund, either through an SIP or otherwise, is to continue doing so in bad times. Historically, every single market crash has eventually proven to be nothing but a buying opportunity which can easily be made to serve the purpose of boosting one's returns.
In the medium to long run, the only thing that matters is the state of the local economy. You might hear a lot of discussions about whether this crash is a buying opportunity or not but in a growing economy, it is always a buying opportunity. A steady, systematic investment strategy was the right one a decade ago, a year ago, and a week ago, and so it is today, and so it will remain for the foreseeable future.