Sensex at 20,000. What am I going to do? Nothing

Our stock market comprises two distinct sets of investors —the first set is the foreign institutional investors (FIIs) who had till the beginning of 2008 pumped in over $60 billion of their money into our stocks. The second set consists of us domestic investors.
Ironically, it is we domestic investors who have traditionally shown far little conviction and confidence in our own markets than our foreign counterparts. When the foreigners invest their billions, thereby driving prices up, we tend to jump on the bandwagon and enjoy the joyride. And when the foreigners liquidate their holdings, thereby driving down stock prices, we stampede out trying to beat them to the exit.

Yes, today the Sensex is at 20,000 — and before the throes of delirium begin, let’s pause for a bit and try and get a perspective. A brief look in the rearview mirror will tell us that
it was hardly a year-and-a-half ago, on March 9, 2009 that the market had fallen all the way down to 8160. And really, nothing much has changed since. Even then, corporate earnings were healthy, GDP growth was good and inflation was in fact lower. Why then is the index up by more than 145%? The answer lies in those three words again — foreign institutional investors.

2009 was the year during which the turmoil in the Western economies was at its peak.

Wall Street giants had fallen by the way side and for a while, there was a real fear of a systemic collapse of the financial system.

Consequently, these foreign investors had sold heavily, not because there was something fundamentally wrong with India but because their parent bodies were in deep trouble abroad. Out of the $60 billion, almost a quarter was exported out. And as the basic economic law of demand-supply dictates, when supply exceeds demand, prices fall.

Now the cycle has reversed and the flipside of the above event is playing out. Since the beginning of the year, foreign investors have injected around $18 billion (Rs 81,000 crore) into the market, thereby taking the Sensex to its current level. Looks like the occidental financial crisis has passed, or at the very least, things aren’t as bad as they were a year ago. Spurning the anaemic growth that Western markets offer, money is fast finding its way to robust emerging markets like India.

How long this horsepower of this money-supply will last is anybody’s guess. But till it does, markets will continue to rise. Till,
of course, the next imported crisis hits. In the meanwhile, it is important not to get overawed by the situation and instead play each ball on its merit.

So here’s what I am going to do — nothing. After carefully studying them, I have invested in some stocks and some mutual funds and I am convinced that these remain intrinsically good investments.

The index falling isn’t going to suddenly reverse the quality of these investments. If anything, I shall look forward to picking up some cheap but quality stuff. Conversely, though the index flourishing is welcome, I am not into this for short-term profits.

Regular readers of this column would know that I am an evangelist of long-term investing. Actually, the term ‘long-term investing’ in my dictionary is a euphemism for the combination of the powerful twin forces of compound interest and time.

Compound interest in solitude means little. And time without the company of compound interest is equally meaningless. So I will let compound interest do its work in the company of time.
In the meanwhile I shall continue my participation in the market by means of systematic investing or SIPs. If the market falls, I get the same stuff cheaper. If the market rises, since I am anyway participating, I make profits. Either way, I win. It is really as simple as that.

Also, the reason that I can go to bed peacefully and get a good night’s rest without worrying about what the Sensex would be up to the next day is because I haven’t invested a rupee more in the market than what my risk appetite allows me to. Consequently, even if the stock market were to shut down, though it would dent the finances, my existence or that of my family’s will not be threatened. This is asset allocation — basically the process of consciously spreading your investments across various asset classes in order to insulate your entire portfolio from the poor performance of any one single class of securities. The objective is to balance risk by means of diversifying.

All of us would do well to treat the current environment (of the market yo-yoing from 21,000 to 8,100 back to 20,000) as a very important life lesson. Investor memories tend to be notoriously short. Though the seduction to throw the kitchen sink behind equities is strong right now, it is important to maintain a cool head.
Investing all your money in any one type or class of instrument is always risky, no matter what the instrument is. Instead, consciously spread your investments regardless of the external environment. Amidst all the noise, do not let go of the basics. Keep it simple, keep it real. Have around 15-20% of your portfolio invested in gold, for gold is an effective hedge during uncertain times. Don’t buy physical gold, instead use exchange-traded funds (ETFs). Allocate another 20% to gilt funds. Cash can command around 15%. The balance can and should be invested in equity, not in a lump sum, but in a staggered manner through systematic investment plans (SIPs).

Don’t borrow to invest. Ever. Do not listen to tips that your neighbour, train friend or office colleague is so gung-ho about. Even if you listen, do not act upon the tip. Instead keep it in mind and be sure to check after a year or so what actually did happen to the hot stock that everyone was so excited about. That is, if it is still traded. Invest with mutual funds with an established track record of at least five years. Choose plain vanilla diversified funds. Then hold fast, hold tight and hold out. And yes, sleep well.

The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com