By Vinay Ahuja, Senior Managing Partner, IIFL Wealth
Stock markets can be irreverent and volatile. They can also be respectful to investors and hold the key to financial stability and growth. It is said that sometimes markets don't really create wealth for years and then suddenly in a short period of time, they create wealth that surpasses expectations. Something similar happened in the Indian markets recently when the benchmark Sensex crossed the 50,000-mark for the first time.
While the recent correction is turning investors overcautious, it has been a long journey for the Sensex from a base value of 124 in April 1979 to 50,000 in January 2021. The compounded annual growth over this 42-year period has been 15.9 percent.
From 1990, when it hit 1,000, the Sensex has witnessed a CAGR of 13.5 percent. However, as any stock market veteran will tell you, this journey has been long and arduous, checkered with volatility and intermittent losses that birthed from political instability, national security, economic slowdown, global events and stock market scams.
The benchmark's recent ascent underscores the true nature of stock markets. After tumbling to a low of 25,638 on March 24, 2020, the Sensex nearly doubled in approximately 207 sessions to cross the 50,000-mark.
As an investor, you either hit the bull's eye or you miss it. The key question is, "What to do next"? Well, without resorting to crystal gazing, it might be worthwhile to revisit certain investing tenets that have held strong over the decades and can help you benefit from future rallies.
1) In a faceoff between "time in the markets" and "timing the markets", only time in the markets can consistently win. Do not expend your energy in trying to find the best time to enter or exit the market. Instead, find the right investment and stay invested over market cycles.
2) Knowledge is your best investment. In any field, as in life, there is no substitute for knowledge. Make an effort to learn and understand at least the basics of investing and portfolio building. For the gaps in your knowledge, find trusted and expert advisers who can guide you in your wealth-building journey.
3) Don't wear your emotions on your sleeve. It is well known that people make sub-optimal decisions when they are in an emotional state of mind. This is true for investment decisions as well. Do not let your emotions and behavioural biases come in the way of making optimal investment decisions.
4) Always maintain diversified portfolios. Nobody is right all the time. The same way, no asset class will perennially generate positive returns. You must build a diversified portfolio spread across multiple asset classes and investment types, so that a single investment cannot have an inordinate impact on your overall portfolio risk and return. Diversification helps you ride out the bad times and benefit from the good times.
5) Discipline is your brahmastra. If there is one thing that can help your overcome the volatility of equity markets, it is investment discipline. You can know all the rules and get the best advice but if you do not follow these in a disciplined manner, you will never be able to truly harness the power of equities.
6) Don't let greed or fear guide you. We are human beings and are influenced by greed and fear. Greed encourages us to make investments that might not be good for us and fear keeps us away from making investments that could be great for us. In both cases, it becomes a lose-lose situation for us.
7) Adhere to your asset-allocation strategy. Asset allocation compartmentalises your portfolio so that the weakness of one asset class does not seep into another asset class. An asset allocation strategy is created after taking into consideration your unique risk-return profile. Its sole purpose is to ensure that your portfolio is able to deliver the expected risk- adjusted returns. This will only be possible if you follow it assiduously.
8) Never compromise on quality. In the world of investing, quality trumps everything else. Sometimes the valuations are compelling and sometimes they are not. Sometimes the expected earnings growth is strong and sometimes it is weak. These variables can change. However, something that will always hold you in good stead is quality. If you invest in quality businesses, you will seldom go wrong.
9) The market is your guru. Respect what the market is telling you. Understand the undercurrents. The idea is not to just beat the markets rather it is to preserve and protect your wealth and grow with the market.