Have you lost faith in the markets lately? Join the club! During times of volatility almost every investor goes through a catharsis, and most of us lose faith in the markets. All the lessons of how equities are the best vehicles of wealth generation are thrown to the winds. Volatility is when you clench your teeth and hang in with your convictions, but not your duds.
It’s all too common to see investors chicken out and book losses on great stocks when markets tank. How do you know what’s great and what’s a dud? Stick to the basics, as this magazine says so often. The classical lessons of investment were reiterated the other day by Prashant Jain, chief investment officer, HDFC Mutual Fund, one of the largest and most respected fund houses in the country. Hearing the person, who manages thousands of crore of funds— and efficiently so—will help you maintain faith in the basics of investing in these turbulent times:
Time in the market is more important than timing Jain asked us to consider staying invested through volatile times, rather than smartly trying to buy and sell all the time. If you randomly choose a single year to stay invested in the BSE Sensex, you would lose money roughly once every three years. But if you increase the period to two years of staying invested, it gets profitable more often. In fact, India’s blundering economy and skittish stock market would have earned you absolute profits almost always in case you stayed invested for over a decade.
Counter volatility—use time and diversify Apart from time in the market, diversification across industries and sectors makes your portfolio less susceptible to volatility in the market or in specific companies. It’s always a good to minimise standard deviation from our investments, rather than only trying to maximise returns.
It’s clear once you figure out the arithmetic: losing 50% requires you to gain 100% to make up for your loss! A year of bad performance with a concentrated position can undo five years or more of good work. But having two lean years on the trot with a diversified portfolio is possibly a better deal. Jain’s emphasis was clearly on not losing money rather than trying too hard to make unreasonably big profits.
The India story Sure, the subprime mess is big and the first world is in serious trouble. So won’t this force the more prudish and conservative among their fund managers and investors to look for better places to invest in? Jain’s retort: where will you find this economic growth rate, this kind of investments in infrastructure, this speed of policy reform in core sectors, this sort of unsatiated hunger for consumption and, after all these years, this kind of conviction that one’s country is going places?
Asset allocation is where you make and lose peace, not just money There is no sure shot cure for volatility, so invest in equities to the extent that you can bear volatility. It’s not just a life-cycle question, it’s a personality thing. If you are 60 and can take a rough ride with 80% of your money, so be it. You could be 40 and settle for 30% exposure to equities, if that is what allows you to sleep well.
Jain’s emphasis is clearly
on style and philosophy of investing rather than the specific opportunity being presented. It’s the long-term attitude that you and I often wish we had.
Head of Research, Wealth Management Advisory Services. He can be reached at
dipen@wealthmanager.ws 
