There may be great turmoil in the markets, but getting out of one's investments in panic would be the worst thing to do
09-Sep-2015 •Dhirendra Kumar
As the markets have turned shaky, the panicky kind of investor is getting closer and closer to panic. The nature of the current turmoil is such that there is no end of dire theories that can be found if one starts looking for them. China, oil, Europe, emerging markets, GDP, rupee, interest rates, it all forms a fog of information. There's little that can be marked out as an objective fact with a clearly predictable impact, either in the past or the future.
It's the perfect environment for those whose instinct is to cut and run. Unfortunately, it's easy to convince ourselves that selling and getting out of this market is the right thing to do. After all, aren't markets all over the world are crashing because smart people are selling? Well, these smart people may have different goals than you or I, and in any case may actually not be that smart. In fact, the other day I read this amazing 'story of the world's worst market timer'.
There was this hypothetical investor who always gets going when the markets have risen far and hard and thus ends up buying at the peak, just before a crash comes. However, he doesn't sell when the markets crash. In the US, this person would invest in the stock markets in 1973, 1987, 2000, and 2007. Each time, soon after investing, a crash in the markets would wipe out a good chunk of his returns. Over this long term, he would still make about 9 per cent returns.
I checked out how such an investor would fair in India. He would invest in 1986, 1992, 2001, and 2008, catching the four great peaks the Indian stock markets have seen. In each case, a major chunk would soon get wiped out. If he had invested a constant amount, the returns would be about 22 per cent, turning the money about 50X!
The moral of the story is that in a growing economy, timing the market is irrelevant--what matters is staying the course.