How to Navigate through Market Dips?

Suman: Hi Pradeep, I’ve been saving for two years now, and I’ve accumulated ₹ 3 lakh, which is just sitting in my bank account. I’ve been thinking about investing, but I’m not sure if this is the right time, especially with the recent market dip. The Sensex dropped from 86,000 to around 81,600 after the Gulf wars impacted oil rates. Should I start investing now, or should I wait?

Pradeep: Hi Suman, first of all, it’s great that you’ve been saving diligently. You’ve taken a significant step in securing your financial future. When it comes to investing, there’s no perfect time. The market will always have ups and downs, but the important thing is to start investing sooner rather than waiting for the ‘perfect moment.’

Suman: That makes sense, but the market dip does seem like a good time to start. I’m just worried about investing a large sum all at once.

Pradeep: You’re right to be cautious about putting all your money in at once. Instead of investing the entire ₹ 3 lakh immediately, you could enter the market gradually using a Systematic Investment Plan (SIP). SIPs allow you to invest a fixed amount every month, which helps you smooth out the impact of market fluctuations. This way, you benefit from both market dips and long-term growth.

Suman: So, a SIP would help me invest even when the market is unpredictable?

Pradeep: Exactly. With a SIP, you don’t have to worry about timing the market. Over the long term, time in the market is more important than trying to time the market perfectly. For example, if you start a SIP now with ₹ 5,000 per month and assume an 11% return (here I have taken a conservative number), you could build a corpus of around ₹ 1.57 crore by the time you’re 60. But if you delay by just five years, that amount could shrink to ₹ 88.55 lakh. That’s a huge difference.

Suman: Wow, I had no idea delaying by just a few years could make such a big difference! But before I jump in, I’m not sure what my investment goals should be.

Pradeep: That’s a great question! Before you start, you need to identify whether your goals are short-term, medium-term or long-term in nature. If you’re saving for something like a vacation in the next three years, you should consider safer options like short-term debt funds. But if you’re thinking about m3dium-term like 3 to 5 years you may consider aggressive hybrid funds and for the long-term wealth building, say for retirement or buying a house, you should look at equity funds.

Suman: I see. But I’m a bit nervous about equity funds since I’m just starting out.

Pradeep: I understand, and that’s why a good starting point could be conservative or aggressive hybrid funds. These funds invest in both stocks and bonds, so they give you some exposure to the stock market but also provide stability through debt investments. They tend to fall less during market corrections, which might give you some peace of mind as a first-time investor.

Suman: That sounds like a safer option. But what if I have more money to invest later on?

Pradeep: If you have more funds to invest, like the ₹ 3 lakh you mentioned, you can deploy it gradually over the next 12 to 18 months through a SIP in aggressive hybrid funds. This way, you reduce the risk of entering the market at a high point and benefit more—you will end up buying more units when prices are low and fewer when they’re high, which lowers your overall cost of investment over time.

Suman: That makes a lot of sense. But what about the current dip in the market? Should I be concerned?

Pradeep: Short-term market movements, like the recent dip, are unpredictable. Investment in equity market is subject to market risk. You would have heard this a lot everywhere. What’s important is that over the long term, the market tends to go up. For instance, despite several corrections, the Sensex has delivered an average annual return of around 13%+ over the past 10 years. By investing regularly through a SIP, you can ride out the market’s ups and downs without worrying about daily movements.

Suman: Okay, that sounds reassuring. Is there anything else I should consider before starting?

Pradeep: Yes, before you begin your investment journey, it’s essential to cover a few financial basics. First, create an emergency fund—enough to cover your six months of living expenses or just in case you face a job loss! You can park this in a liquid fund. Then, if you have any financial dependents, make sure you have life insurance, preferably a term insurance plan. At last, get a health insurance policy. Even if you have coverage from your employer, it’s good to have a personal policy for added protection. Also, do remember that the younger you are the better for you to take a health plan as it will be a cheaper proposition for you along with a Super Top Up Plan.

Suman: Thanks, Pradeep. I hadn’t thought about the emergency fund or insurance. I’ll make sure to sort those out before jumping into investments.

Pradeep: Great! Once those are in place, you’ll be well-prepared to start investing and build long-term wealth. Just follow this mantra – it’s all about starting small and being disciplined and consistent.

Are you in your 40s and still with no Savings? Here is a plan for you

Ramesh: You know, Sweta, most of the investors I meet in their 40s or older start getting really serious about their investments. But people in their early 30s don’t seem as concerned about retirement. They think they have plenty of time to deal with it later.

Sweta: Yeah, I’ve noticed that too. When you’re in your 30s, retirement feels so far away. It’s easy to think you’ve got years before you need to start worrying about it.

Ramesh: Exactly! But that’s one of the biggest mistakes people make. They underestimate the power of compounding. Just imagine if they realized that investing as little as ₹117 per day at age 30 could make them a Crorepati by the time they retire at 60.

Sweta: Wait, seriously? Just ₹117 a day? That doesn’t sound like much at all!

Ramesh: It really isn’t. But the numbers get staggering if you wait. If you start at 40, you’d need to invest ₹381 per day, and if you wait until 50, that jumps to ₹1,522 per day to reach that same ₹1 crore goal.

Sweta: Wow, that’s a huge difference! It really shows how much time plays a critical role in growing your money.

Ramesh: Exactly. The earlier you start, the easier it is. But when people come to me in their early 40s with no savings, it becomes a much more serious conversation. There’s still hope, but the approach has to be more aggressive.

Sweta: What would you recommend for someone in their 40s with no savings?

Ramesh: If they want to retire comfortably in the next 20 years, they need to take some drastic steps. First, they should start investing half their salary in equity mutual funds immediately. No delays.

Sweta: Half their salary? That’s a big commitment.

Ramesh: It is, but it’s necessary at that stage. Let’s take a family of three, with monthly expenses of ₹50,000 and a post-tax salary of ₹1,00,000. If we assume inflation at 6% for the next 20 years and mutual fund returns at 11% annually, they could accumulate around ₹4.67 crores by the time they’re 60.

Sweta: So, this plan could still work for someone starting in their 40s?

Ramesh: Yes, but it’s not easy. It requires a lot of discipline.

Sweta: For those in their 30s, though, the power of compounding can work wonders. They’d only need to invest around 25-28% of their income each month, compared to someone starting at 40, who’d need to invest 50% of their salary.

Ramesh: Exactly, it all comes down to how much of your income you can set aside and how disciplined you are in maintaining that.

Sweta: So, essentially, the earlier you start, the less painful it is, and the more flexibility you have.

Ramesh: Precisely. Time is your greatest asset when it comes to investing. If more people in their 30s understood that, they’d have a much smoother path to retirement.

The SIP Dilemma: Timing the Market vs. Time in the Market

One bright morning, Rohit and Mohan, two old friends, met for their usual coffee catch-up. Both had been hearing about the benefits of SIPs (Systematic Investment Plans) and decided to dive deeper into how SIPs work. Rohit was eager to understand when the “best time” to start an SIP was, while Mohan was more interested in the long-term impact of starting at different points in the market cycle.

Rohit: “Mohan, I’ve been thinking. What if we could predict the exact top or bottom of the stock market? Wouldn’t it be better to start my SIP at the bottom when prices are low?”

Mohan: “Hmm, sounds tempting, but there’s more to it than meets the eye. Let’s assume for a moment that you do have magical powers and can start your SIP at the perfect bottom. I, on the other hand, will start at the top when the market is at its highest. Want to see who ends up with more wealth in the long term?”

Rohit (laughing): “Alright, let’s do it! But it’s pretty obvious that you’d be worse off starting at the top, right?”

Mohan pulled out a notepad and began explaining.

Mohan: “Let’s take an example. Imagine back in January 2008, you started a monthly SIP of ₹10,000 in the BSE Sensex TRI. The market was at its peak then, just before the big crash.”

Rohit: “Ouch, sounds risky.”

Mohan: “True, but bear with me. By July 2024, you would have invested ₹19.9 lakh in total. And guess what? Despite starting at the top, the value of your investment would now be ₹74.7 lakh with an annual return of around 14.4%.”

Rohit (raising an eyebrow): “That’s quite impressive. But what if I had started at the bottom?”

Mohan: “Great question! Now let’s say you began in March 2009, right after the market crashed (The Great Recession). You’d have invested ₹18.5 lakh in total, slightly less than me. However, your investment would now be worth ₹63.8 lakh, with a return of 14.7%.”

Rohit (surprised): “Wait a second! I’d make less, even though I started at the bottom of the market?”

Mohan: “Exactly! While your percentage return is slightly higher, I’ve invested more because I started earlier, so my overall wealth is greater. This is what we call the Cost of Delay. The longer you wait to start, the bigger the gap becomes. Missing out on those early months or years can cost you a lot in the long run.”

Rohit: “But why is there such a big difference?”

Mohan: “It’s simple: compounding. Time is the most powerful tool when it comes to investing. The longer your money stays invested, the more it grows. Even though the market was at its peak when I started, my money had more time to compound. Over time, the highs and lows even out, and the timing becomes less important.”

Rohit: “So, in the long run, it doesn’t really matter if I start at the top or bottom of a market cycle?”

Mohan: “Exactly! Over many years, the difference in returns between starting at the top or bottom becomes almost negligible. The real risk isn’t the market; it’s not starting early enough. The biggest mistake is missing out on the power of compounding.”

Moral of the Story:

Mohan summed it up, “Rohit, it’s not about timing the market, but time in the market. The earlier you start, the more wealth you can create. Waiting for the ‘perfect’ moment can cost you far more than starting at a peak ever will.”

Rohit nodded thoughtfully, realizing that the best day to start his SIP was not tomorrow, but today. So do not waste your time and keep things simple.

The Profit Temptation: Navigating Market Highs with a Long-Term Vision

Last Thursday afternoon, I received a call from one of my investors. His voice was a mix of excitement and uncertainty.

“I’ve made a profit of ₹20 lakhs over the past five years through my SIPs,” he said. “But now the market is soaring, and I’m thinking about booking some of those profits. I still have a long-term goal of investing for another 12 to 15 years, though. What do you think I should do?”

This is quite a common question when markets reach all-time highs. The gains are real, and the numbers in your portfolio look promising, but there’s also that lingering fear of losing it all if the market takes a nosedive tomorrow. It’s the classic struggle: Should I stay, or should I cash out?

The Psychological Dilemma: What Happens If You Sell?

I began by explaining to him the psychological games our mind plays when markets rise and our portfolios grow. Selling your investments during a market high feels like locking in your gains, but it also opens up a set of new challenges:

If you sell and the market continues to rise, you might start to regret your decision. It’s natural to feel like you’ve missed out on even bigger profits. Re-entering the market can feel daunting, as the prices are higher, and you’ll fear buying back at the wrong time.
If you sell and the market goes down, you might feel a sense of satisfaction for having timed it just right. However, this feeling can be misleading. When the market starts dropping, it’s common to wait for it to “bottom out,” but no one can predict when that bottom will come. The fear of re-entering at the wrong moment can make you stay out of the market for too long, missing the eventual recovery.

It’s important to remember that markets are unpredictable. Sometimes they soar higher after hitting new peaks, and at other times they correct sharply. Trying to guess what will happen next is risky and can often lead to emotional decisions that may not align with your long-term goals.

A Journey Through the Market’s Highs and Lows

I reminded him, “You’ve earned this ₹20 lakhs because you stayed invested through both good and bad times. Think back to the periods when the Sensex was highly volatile, dropping more than 5% in a week. Those were tough moments, but because you remained patient and kept your SIPs running, you’re now seeing these impressive gains.”

The point here is simple: staying invested has rewarded you in the past, and there’s no reason why it wouldn’t continue to do so. It’s the steady, disciplined approach that leads to long-term wealth creation. The market will always have highs and lows, but a long-term investor learns to weather those storms, not run away from them.

Managing Anxiety: Adjust, Don’t Panic

If market highs are making you anxious, there’s no need to rush into selling your investments. Instead, consider rebalancing your portfolio. Here’s what I suggested to him:

If you need cash for short-term goals, such as buying a house, funding your child’s education, or any other near-term commitments, it’s wise to move some of your gains into safer, fixed-income options like bonds or debt funds. This ensures that if the market does fall, you’ve protected the portion of your money that you’ll need soon.

If your goals are long-term, like retirement, stick to your SIPs. Equity markets are volatile in the short term, but over longer periods, they tend to smooth out. Trying to time the market perfectly is nearly impossible, and most successful investors are those who stay invested, not those who constantly try to jump in and out.

The Value of Asset Allocation

To further ease his mind, I brought up asset allocation. A well-thought-out allocation between equity, debt, and other assets (like gold or real estate) helps manage risk while keeping your portfolio aligned with your financial goals.

Here’s the beauty of it: a solid asset allocation strategy allows you to book profits periodically without the stress of making huge decisions during market highs. For example, if your equity portfolio has grown significantly due to the recent bull run, you could sell a portion and shift it into a safer asset class to rebalance your portfolio. This way, you lock in some gains but still stay invested for the long run.

Final Thoughts

I closed our conversation with this advice: “The key to successful investing is not in trying to perfectly time the markets, but in staying disciplined and sticking to your long-term plan. The market will have its ups and downs, but as long as you stay focused on your goals, you’ll continue to see your wealth grow.”

He listened carefully, then thanked me for the advice. By the end of the call, he had decided to stay the course and trust the process that had already brought him this far.

That’s the thing about investing. It’s a marathon, not a sprint. The markets will rise, and they will fall. But if you keep your eye on your long-term goals, stick to your asset allocation, and avoid being swayed by emotions, the rewards will follow.

And sometimes, the best decision you can make is to simply stay invested.

The Tale of Two Investors: Simplicity V/s. Complexity in Wealth Building

Today, let me take you through the story of two friends, Aryan and Sameer.

Both friends had inherited inherited ₹ 15 million from a long-lost relative. Both had the same goal: invest wisely and grow their wealth over the next 15 years. However, their investment journeys were poles apart, shaped by the choices they made and the advice they followed.

Chapter 1: The Advice Dilemma

Aryan, eager to make the most of this once-in-a-lifetime opportunity, turned to an online Question and Answer forum on a social media for advice. He had heard about index funds—specifically, those from a US based Investment company —and was inclined to invest in a few, sit tight, and watch his wealth grow. His goal was simple: he didn’t need the money for the next 15 years and wanted to grow it safely without much hassle.

But as Aryan scrolled through the responses, the sheer number of suggestions overwhelmed him. One set of Gurus argued passionately for buying properties, citing rental income and capital appreciation. Equity traders recommended actively managing a stock portfolio for higher returns, while hedge fund advocates touted complex strategies that promised outsized gains. And, of course, the gold enthusiasts warned of economic collapses, urging Aryan to convert his fortune into precious metals.

Sameer, on the other hand, consulted a private banker. The banker presented a glossy portfolio filled with sophisticated products: alternative investments, structured notes, and even a fund promising returns based on rare whiskey investments. It all sounded impressive, and Sameer, intrigued by the exclusivity, signed up for the services.

Chapter 2: A Matter of Simplicity

Aryan, however, found himself at a crossroads. After reading a diverse range of opinions, he attended a webinar on goal-based investing. The presenter’s message was simple but timeless: “Investments should be aligned with your financial goals, match your investment horizon, beat inflation by a reasonable margin, have the liquidity you need, and come with low costs.”

The simplicity of this approach resonated with Aryan. His goal was to grow his wealth for the long term, so a 15-year investment period made sense. He didn’t need the money now, so he could afford to invest in assets that would appreciate steadily. The advice about keeping costs low and beating inflation also clicked. Aryan chose to stick to his original plan of investing in low-cost index funds, which offered broad market exposure and minimal management fees. He saw this as the most prudent way to beat inflation over time and achieve long-term growth.

Sameer, meanwhile, was excited by the exclusivity of his investments. His private banker assured him that these unique strategies would outperform the market, offering much higher returns than the “boring” index funds Aryan had chosen.

Chapter 3: The Path of Patience vs. The Trap of Complexity

As the years rolled by, Aryan’s simple, goal-based investment strategy began to bear fruit. The low-cost funds provided steady returns, benefiting from the overall growth of the global economy. The power of compounding worked its magic. Aryan didn’t have to monitor the market obsessively or make sudden moves when the economy dipped; he trusted his 15-year horizon and his original plan.

On the other hand, Sameer’s complex investments started to unravel. The private banker had charged significant fees for managing the exclusive portfolio, eating into Sameer’s returns. Some of the exotic products didn’t perform as promised, and the volatility of hedge funds and alternative investments caused anxiety during market downturns. Sameer found himself checking his portfolio more frequently and making impulsive decisions to switch investments based on the banker’s suggestions. The costs of active management and the underperformance of several products left Sameer disillusioned.

Chapter 4: The Lesson of Simplicity

By the end of 15 years, Aryan had more than doubled his wealth, thanks to his disciplined, goal-oriented approach. His funds had not only outpaced inflation but also delivered healthy returns, all with minimal stress and effort.

Sameer, despite starting with the same amount, found that his complex portfolio had barely kept pace with inflation. The high fees, the underperformance of exotic investments, and the constant switching had eroded his gains.

Reflecting on their respective journeys, Aryan realized that the simplest approach had been the best. His initial instincts, backed by solid principles of goal-based investing, low costs, and long-term focus, had led him to success. Sameer, meanwhile, regretted falling into the trap of complexity, exclusivity, and high fees.

—————————————————————–

Conclusion: The Fundamentals Remain the Same

Aryan’s story is a powerful reminder that the fundamentals of investing never change. Your investments should always align with your financial goals, (REFER to my earlier Blogs posted in Aug 2024) and the period should match your needs. It should beat inflation, have the liquidity you might require, and, most importantly, come at a low cost. Amid all the noise of various financial products and strategies, sometimes the simplest route—funds, patience, and discipline—is the wisest.

And so, Aryan and Sameer’s tale ends with a lesson for all investors: don’t be swayed by the allure of complexity or exclusivity. Instead, focus on the timeless principles of investing, and you’ll set yourself up for success.