As investors cheered this achievement, the euphoria turned into gloom. The reverberations of global financial meltdown sent shockwaves across the globe – Sensex witnessed a drawdown of -61% during 2008-10.
Maximum Drawdown is a measure of the biggest drop in the value of an investment from its peak to its lowest point over a certain period of time. It shows the largest loss you could have faced if you bought at the highest point and sold at the lowest.
Naturally, many investors were unnerved by this meltdown and rushed to either exit or refrain from investing during this crash. As the world recovered from this shock, Sensex recovered to its previous high by 2010, in two years. It took the Sensex a decade to add 10K points to reach 30K level in 2017 from 20K in 2007.
In September 2024, Sensex crossed another milestone of 85000. The growth reflects the underlying macroeconomic shifts in the Indian economy.
India’s weightage in the MSCI Emerging Markets Index has increased from around 6% a decade back to 20% in 2024. (Source: MSCI). Recently, India (2.35%) toppled China (2.24%) to become the sixth largest market in MSCI Global Index.Owing to sustained domestic inflows in the recent past, the number of days taken for recovery from drawdowns is getting shorter and investors waiting on the sidelines risk missing out the rally.It’s difficult to predict market movements but it is reasonable to infer in hindsight that investing at dips/market corrections can provide a reasonable upside for investors who have the patience and conviction to ride through the volatility. Hence, the best approach would be to stay put.
We combed through some data from January 2006 till September 2024 to see the impact of missing the best days in Sensex versus staying invested for this entire time period.
The below table shows the return earned by different sets of investors (time period of missing out the best days by staying out of the market). Evidently, those who have exercised patience by staying invested throughout this over 18-year period have earned a CAGR of 14%.
Missing even the five best days can hurt your portfolio with three percentage points lower return while those who have missed the 50 best days ended up earning negative -1%.
One simple way to overcome this behavioral challenge is to invest through Systematic Investment Plan (SIP) so that you do not miss out on those days.
For a vast majority of investors, this staggered approach to investing takes the “timing the market” aspect out of the equation.
Thus, at the cost of sounding preachy, what we can conclude is that lazy investors who didn’t react to news/events by taking action have performed better than those who stayed out of markets fearing correction or waiting for the ‘right’ time to enter.
The right time is now
As investors, you would be bombarded with headlines of markets reaching all-time-high. But markets have tested many all-time-highs in the past and basing your investment decisions on these levels can be counterproductive.
“The best time to plant a tree was twenty years ago. The second best is now,” goes the timeless adage. If you have never invested in equities and are waiting for the opportune time to enter when markets correct, you may be left waiting. Rather, you could start investing to plan for life goals by consulting your trusted financial advisor and not ponder over the right time to start.
Investors would do well to take action based the following triggers:
• Following a goal based investing approach helps you stay focused on your investment journey irrespective of what’s happening in the market. If your current asset allocation has drifted from its original target, it is wise to prune your exposure back to your desired asset allocation.
• The second instance when you can realign your portfolio is when you are nearing a goal. Around 6 to 12 months before approaching a goal, you can start shifting your corpus into Conversative Hybrid Funds to shield the corpus from the vagaries of the market.
• The third instance when you can look to tweak your portfolio is when your funds are not living up to their stated mandate and removing/adding new ones would add value through diversification not just through market cap but also investment styles such as value, growth, momentum and quality. For investors who are keen to make the most of volatility, keeping some dry powder for tactical allocations can also be considered.
For those who are worried about mixed cues of geopolitical situation, Sensex reaching all time high and intermittent volatility, participating in equities through Balanced Advantage Funds/Dynamic Asset Allocation Funds or even Multi Asset Funds would be a good option as these funds have an in-built model to take the asset allocation on your behalf and also provide the benefit of diversification.
To sum up, markets will continue to be driven by human innovation and growth with intermittent corrections on the way.
Thus, once you have invested based on your risk appetite and goals, you should review your portfolio periodically with the help of a trusted advisor and try to stay the course till your goals are met.
(The author is CEO of PGIM India Mutual Fund)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
