If someone has just started investing in Indian equity markets recently than the probability of getting mediocre returns over investment or even negative return is much higher. Well, we bet that’s what you haven’t heard from your new Mutual Fund or SIP investment advisor touting minimum 25% returns, have you?! Ok let’s go through what are the possible future scenarios and you can decide their merit yourself.
- ) Market keep on chugging 25% annually over next few years
Everybody would love that, wouldn’t they?! While everything is possible in this universe, this scenarios is highly unlikely to materialize. Because when every man and his dog has already invested in equities then from where the loads of new money will come from to buy more stocks and keep the markets buoyant. Now free money via QE has either stopped or about to stop from pouring in via various central banks. Instead they are rising interest rates and eventually bonds will start competition with lofty equities.
- ) Market’s remain stagnant
It is likely. If love and peace prevails then nothing will happen to disturb the current equilibrium and investors will be happy to hold whatever they have got at whatever price they have paid while allowing companies to catch up with earnings to such lofty ( and often unrealistic ) P/E multiples. That said, for many stocks, good news from even next century has already been priced in. And if someone still invest in them believing much further appreciation then you know what to call him/her, but let’s say no such event happens which can point finger to such valuation then of course it is possible that they just freeze there basking in the moment of glory.
- ) Market goes down
Very likely. At some point investor lose patience and usually something happens which starts the chain reaction. Every time reason is never the same but things DO happen, no matter how hard you try to prevent them. Markets always oscillate between extremes of greed and fear and that is never going to change.
Gullible Sheep Will Be Fleeced Again And Again
Even when they had mediocre returns and no strong case to invest in their funds, Mutual fund and other investment companies were able to suck in billions to invest with creative presentation tactics. Fortunately now they have everything in their advantage. You ask for historical returns ranging from last 15 years and they will be able to provide you anything ranging from 25 % to 125 % ! Even more in some cases. And that is also without manipulation or misrepresentation! Simply because general tide has lifted all boats. Even a monkey picking the stocks could have produced consistent double digit returns for last decade. So now they can shamelessly advertise to get you addicted to SIP or any other MF investment plan.
That money is eventually supporting the market. Every month many thousand crore pours into the equities via such investment vehicles. Any colleague you ask and he will just tell you how he has made millions by investing in XYZ Mutual Fund ! Any media investment guru you listen to will advice to invest more during each 5/10/15 % drop. Well that will help the market to reach unsustainable heights. Dips will keep on getting shallower and after losing the patience, people will keep on investing at unimaginable valuations. Such foolishness is destined to get punished if not today then tomorrow. Once again, most investors will fulfill their destiny by losing money and will vow never to invest again ! ( until next bubble height of course 😉 )
Then What Should One Do? Not To Invest At All At Such Valuation?
Everything depends upon your investment horizon and your expectation. If you are expecting next two years of 25% rise, then maybe you shouldn’t. Expecting 10% over next 15 years then you may ! If you don’t care about your invested principle for next 20 years then may be anytime is good time ! But the fact is, majority of investors are here for quick gratification and don’t have Buffet-esq patience and pocket ! Value investor’s best virtue is patience. 99.99 % simply lack that patience and will definitely lose money. In investing, just being smart doesn’t matter, you need to be smarter than other investors because what you have bought, must be sold at higher price to someone else ! If everybody is smart, everybody will try to buy and sell at the same price ! So it is always the case that top 5 % will make money, no matter what.
Your friend, neighbor or colleague might have made millions over the past few years by investing in stocks but if it’s just because they happen to invest without understanding then many will lose that profit and even more in coming years. Why? Because now they just think that it is easy to get 25% every year so they will not only put back their profit but will borrow ! 😀
It is about to become or has already transformed into a traders market now. If you can trade it, you can make it. For example, let’s say NIFTY is at 10,000 after a year then investors may not be able to make anything but trades can ride each up and down and trade both sides of the market to generate returns. But trading is not everybody’s cup of tea. Part time traders lose miserably during unexpected volatility rise when they can’t get out of their office meeting to manage the position. Long steady bull run like this gives many people false confidence that they are good traders. Eventually when market type changes, they fail to realize and lose more than they have made during the bull market. Besides, lack of volatility during the bull market makes trades complacent and they take much bigger positions than their risk tolerance to generate the similar return, only to see volatility spike and ruin everything. If you can take a page from Forex trading then it’s similar to EUR/CHF trading between 2012 to 2015. Many new traders made thousand of $$$ doing simple trade of buying EUR/CHF against 1.20 peg set by Swiss central bank and eventually lost everything and even fall into the debt because of just single day event.
Bottom line is that now it is time to trade carefully. We won’t say good luck trading because now if your luck has helped you get 100% return over a decade because you just happen to invest in XYZ Mutual Fund, then now that luck part is about to run out 🙂
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