While 2014 started on a grim note, it ended quite well for the financial assets. However there is no point chasing winners of the previous year, as winners rotate. It is the time to diversify and invest as per one's goals.
This is again that time of the year when the business and investment world considers doing the following:
1. Looking back at the year gone by
2. Preparing a list of resolutions for the coming year
3. Predicting what lies in store in the coming year
Let us also indulge into the same exercise.
The year gone by started with many uncertainties for the investors on the back of a really bad 2013. (To understand what we mean by a bad year, please read our article here.)
While 2014 started on a grim note, it ended quite well for the financial assets – equity indices were up by around 25% to 30% for the year and fixed income delivered double-digit returns. However, the physical assets had a miserable year – with gold registering second straight year of loss. Real estate had a lackluster year. While the physical asset classes, viz. gold and real estate had been the outperformers in the previous years, they delivered lower or negative returns in 2014. Financial assets on the other hand had a bad 2013, but a stellar 2014. This supports the old theory – “Winners rotate” – last year’s winners may not continue to be so. At the same time, it also supported a long-held belief that it is impossible to consistently pick up winners.
We expect such surprises to continue in the coming years, as well.
Almost throughout the year, there were demands for reduction in the interest rates. However, the Reserve Bank of India did not oblige. Though the rate cut is still awaited, the long-term bonds (10 year G-sec) have seen a roughly 50 basis point reduction in the yields. The market prices have moved ahead of the actual event. This is the beauty of an open market where it is the popular opinion that drives the prices. Those still waiting for the rate cut to happen have already lost some upside – last year, long-term G-Sec funds delivered close to 12% returns.
This is the classic “buy on rumors, sell on news” theory.
Waiting too long before the news is confirmed is often too late in most cases.
For investors, we do not have a different message for 2015. We have always believed in some truths. We would like to remind ourselves of the same this year, too:
• Predicting the market moves is almost impossible. You may get lucky some time, but consistently profiting from such an activity is imprudent.
• The market prices run ahead of the real event, making it even more difficult for one to predict
• In the absence of the ability to predict, the greatest defense for an investor is diversification – across companies, across industries, across asset classes and across geographies or currencies
• Winners rotate – it is, at the cost of repetition, impossible to predict the future winners – stay away from such futile exercise
• At the same time, it is a favorite pastime of many to explain what happened and why
• Stay focused on your goals and plan your investments accordingly.
• Do not focus too much on short term events
Wish you a very happy, healthy and wealthy 2015!
The author runs Karmayog Knowledge Academy. Views expressed here are his personal views. He can be reached at firstname.lastname@example.org.