Equity markets are known to be inherently volatile. It is for this reason that financial advisors advising investors to invest in equity markets generally do so after gauging their risk appetite, with an added caveat to invest with a long-term investment horizon.
Yet, every bout of volatility in the equity market is generally received by an even stronger bout of panic reaction from investors resulting in hasty and nasty decisions such as selling of investments, discontinuation of Systematic Investment Plans (SIPs) etc., with little realization that such kind of spontaneous reactions to market volatility would in fact convert investors’ notional (book) losses into actual losses.
Similarly, by discontinuing the ongoing SIPs during market corrections, investors in fact give away the opportunities to get value bargains when the markets eventually get cheaper after corrections.
The situation here can be compared to a ‘sale season’ where shoppers are known to hunt for best bargains on quality products. The idea is to get the best value on the money spent. Such is the euphoria for a sale season that many shoppers in fact tend to prepare their wish lists well in advance and wait for the sale season to take off to make their purchases.
Unfortunately, this kind of euphoria is grossly amiss in the case of equity investing, where generally an investor, who, in a market upcycle, is willing to invest an ‘X’ amount in an equity investment, shies away from investing in the same equity instrument even when it is available at a price much lower than ‘X’ following the market correction. It is rather unfortunate to see this contrary human behavior for equity investing where the willingness to buy expensive is much stronger than the inclination to buy the same investment at cheaper rates. While here one may argue that it is not possible for investors to gauge what levels are attractive for investing, this is also precisely the point that we are trying to make.
There is no point in timing the market since the market, inherent to its nature, will continue to move in cycles – ups and downs. While investing only in up cycles could be damaging, most investors would neither want not wait for a downcycle – out of presumed fears of losing. Investors here need to believe that a down market does not and should not imply end to equity investing and that every downcycle is, sooner or later, followed by an upcycle and vice-versa. This cycle of ups and downs is an almost certain trait of equity market. The only thing that is not certain here is the time…or the length of the downcycle or upcycle.
So, the only ideal approach to invest in equities is to invest across all cycles – ups and downs, and eventually, even out expensive purchases with cheaper ones over time. This is where systematic investing or SIPs are the most sought after medium of investing and this also explains why one should never discontinue SIPs in downcycles since it is only during market corrections that investors can get the best value of their money and investments.
Also, investors should do well to remember that equity investment is majorly done with an intention to meet one’s long-term financial goals, and asset allocation is the key to make the most of any investment. Investors should thus consult their financial advisors to help better understand their allocation to equities and other assets in every market condition and plan investments accordingly to optimally gain from their investments.
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