Expert advice

Sep 25, 2013,15.07 IST

Is bailing out of the markets a right option?

Suresh Sadagopan
Ladder7 Financial Advisories

I know it has been a frustrating five and half years, since 2008. All that can go wrong, did go wrong.  We plumbed the depths of despair more than once, in this period. Inflation has been quite high for most part of this period and had made you cry, though onions were not always the cause!

We have been despairing about the inaction, corruption, profligate spending of the government leading to fiscal deficits, the anti-business stance which they often take to score political brownie points…  The economy is in the doldrums even now.

Also read: What can bring economic bloom to India?

The stock markets have inexplicably gone up inspite of the bad prognosis. There are two proximate emotional reasons for it – the QE taper has been deferred in the US ( which is a case of kicking the can down the road, which means we need to confront the problem sooner than later; but that is another story ) and the euphoria which Raghuram Rajan brought in.

And you tell me it provides you with a great exit point.  Let’s see if it makes sense.

Why had you invested the money?

You had invested the money to fulfill some future need -  like your children’s education, retirement corpus creation etc. I suppose you had allocated the money in a premeditated manner, into different asset classes. Your advisor must have told you about the benefits of asset allocation.

Different assets have different characteristics and will not all give returns at the same point. At various points, it could be a different asset, which starts doing well. There is no way of knowing in advance, when which asset will perform. But we do know that over time a particular asset can offer returns at a certain level.

If all these were known, there should be no reason to panic in connection with the equity markets and it’s returns.

Aren’t the equity returns abysmally poor?

While complaining about the poor returns of over 5 years, we have forgotten the rise of the sensex from 3000 levels in 2003 to 20000 levels in end 2007. Even factoring for poor returns in the past 5.5 years, the returns from 2003 onwards till date is 18 percent plus compounded.

No asset class would be able to match that, including property. Do the math and check it out. Check out for various other periods ( longer the periods, the better  the chances for eliminating specific timing biases ) and equity will return robust double digit returns.

How long have you stayed invested?

You don’t have investments done from 2003? All your investments were from 2006 & 2007 and you again sold most of it in 2009? That would be the problem.

In case of property, people are willing to stay invested for very long periods as buying and selling is too much of a hassle, has tax implications, costly due to costs like registration, stamp duty , brokerage etc, is not quoted on a daily basis and is illiquid & hence not easy to sell in the first place.

The main problem is that retail investors come in at the fag end of the rally and end up buying when prices are high. They also end up panicking and selling during downturns. That is the real reason why retail investors constantly complain that they do not make money.

So you want to exit? Where are you going to put in the money?

Many want to exit now as the stock markets are somewhere close to the historic highs. There seems to be a conviction that it cannot breach the highs made in the past. What is stopping the Sensex from going to say 25,000? We all know that the economic situation is bad. But, with time, it will resolve itself.

There is no reason to panic , exit and invest somewhere and try to time the entry back. We saw earlier that all assets will not perform at all points, didn’t we? So, why are we losing sleep?

Just because debt is doing well, you cannot put all money there. That will ensure that the asset allocation suggested earlier on is deconstructed. Small tactical changes can be done, but the strategic asset allocation cannot be completely undone, without affecting the overall plan itself.

When do you get back in?

Many blithely talk of exiting now and investing when the market has bottomed out. Understanding that the market has bottomed out is as difficult as realizing that God resides within each one of us!

What happens is that when the markets trend lower, you expect it to go even lower. If it starts climbing up, you expect it to come back to the previous lowest point so that you may buy! Markets don’t indulge you in your fantasies.

Apart from making some tactical changes in the asset allocation, it is best to not keep tinkering with the allocations. Maybe, there is a case for a review and recast – but this does not mean undoing the portfolio created.

It may just mean supplanting some that have not done well with others that hold more potential, within the same asset class.

Conclusion -  Always seeking out what is doing well would not mean better outcomes. It only shows a lack of understanding about the fact that various assets perform well at various points and you need the various assets to reach the destination.

An orchard full of different trees will yield fruits of varying quantities and values in different years. One cannot change all papaya trees to mango trees, when Mango fruits are in demand and selling at high prices.

Every year some fruit may be very remunerative and others less so. But there is no way to predict which one will be in demand next year. On the balance it is better to have an orchard full of different trees than have only mango trees and do very well one year and court disaster the next.

Assets are no different and should be held in the right mix. It is a test of one’s patience. I have heard the maxim that says that those endowed with patience rule the earth. No truer word had ever been spoken!

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