For Individuals Who Can Set Aside Money to Own Stocks for a Long Time, Now is as Good a Time as Any to Invest
Is it too late to buy stocks?With the Bombay Stock Exchange's Sensitive Index having more than doubled since March, and less than 20% away from its all-time high of 20873, some people may feel that they've missed the boat.
When I asked a journalist friend recently if he was investing in stocks or stock mutual funds, he said, "Now it's too late. I should have bought when the Sensex was at 8000." The index closed at around 17170 on Wednesday.
A similar story has played out in other parts of the region, with Hong Kong's Hang Seng Index up 95% and Australia's S&P ASX 200 up 50% since their respective lows in March.
True, it would have been better to buy earlier this year. Some experts are now even expecting stocks to lose value in the near term because of their rapid gains.
But nobody can say for sure when, or if, any such dip will come. For individuals who can set aside money to own stocks for a long time, ideally five years or more, now is as good a time as any to invest.
Nobody knows what's going to happen over the next 10 days or 10 months, but history shows that, generally, over long periods of time stocks gain value. After all, the price of a company's stock essentially reflects its value, and if a company grows over the years its stock will too. As long as the Indian, Chinese or Australian economies keep growing, so will the bottom line of many well-run companies.
In the past five years, the 30-share Sensex has gained 170% in price. Even during the recent market downturn, you would have made money had you been invested for at least five years. So, 1,00,000 rupees invested in the 30 Sensex stocks on March 10, 2004 would have become around 1,40,000 rupees as of March 9, 2009, the worst point of the recent downturn (not counting any dividends paid out on stocks).
Using the past as a guide, we can assume that even if the market loses value in the next few months, it is likely to grow much more than the current 17,170 over the next three-, five- or ten years. At that time, in hindsight, Sensex will appear to be cheap now.
Nobody knows what's going to happen over the next 10 days or 10 months, but history shows that, generally, over long periods of time stocks gain value. After all, the price of a company's stock essentially reflects its value, and if a company grows over the years its stock will too. As long as the Indian, Chinese or Australian economies keep growing, so will the bottom line of many well-run companies.
In the past five years, the 30-share Sensex has gained 170% in price. Even during the recent market downturn, you would have made money had you been invested for at least five years. So, 1,00,000 rupees invested in the 30 Sensex stocks on March 10, 2004 would have become around 1,40,000 rupees as of March 9, 2009, the worst point of the recent downturn (not counting any dividends paid out on stocks).
Using the past as a guide, we can assume that even if the market loses value in the next few months, it is likely to grow much more than the current 17,170 over the next three-, five- or ten years. At that time, in hindsight, Sensex will appear to be cheap now.
Start by calculating how much you already have in stocks, either directly or through stock mutual funds, or unit-linked life-insurance plans, which have an investment component. This is your total allocation to stocks currently.
Compare this with what you think is an ideal allocation over the long term, depending on the amount of risk you can handle and the time period for which you're investing. We'll call this your "target allocation." Individuals who aren't close to retirement, and can handle moderate risk, can typically have half of their assets in stocks.
If your current stock allocation is less than your target, get into the market "in bits and pieces," says Pankaj Narain, Deutsche Bank India's director and head of private clients, banking and investments. "This spreads your risk a little bit."
Mr. Narain is referring to the practice of "rupee-cost-averaging," in which individuals invest small portions of their money over a period of time.
So, for instance, if you want to invest 1,00,000 rupees, split it into five (or 10) portions, of 20,000 rupees each, and invest each portion at specific intervals, say on the first of every month. That way, if there's a dip in the market over the next five months, you'll be able to catch the lower price. Alternatively, if the market rises, you will have locked in some lower prices early on.
As an example: Assume that the current net asset value or price of a stock mutual fund that you want to buy is 15 rupees per unit. If you invest all the money in it now, you pay 15 rupees per unit.
However, if you follow cost averaging, the average price of the fund unit will be different. If stocks decline over the next five months and bring down the fund price to 14 rupees, 13 rupees, 12 rupees and 11 rupees, then you've bought the fund for an average of 13 rupees per unit.
Alternately, if markets rise and the fund price goes from 15 rupees, to 16 rupees, 17 rupees, and 18 rupees and 19 rupees, the average purchase price is 17 rupees. In this case, the average price is a little higher than what you would have paid if you had invested all the money at once. But that's the price you pay for hedging against the possibility of a decline in stocks.
Individuals are best off investing in stocks through a diversified mutual fund that buys a number of stocks from different industries, as that again spreads your bets. Many mutual funds in India offer "systematic investment plans" that allow individuals to invest over a period of time.
People looking to make big bucks on stocks in a span of few months or a year may have lost their opportunity. Most market experts believe the worst of this downturn is over, so short term gains will be moderate from here.
Finally, a note for those whose stock allocation may have soared more than what they had planned: Consider selling some to come back to the original target. Use the sale proceeds to buy whatever is less in your portfolio, such as perhaps bond mutual funds.
Remember, when it comes to investing, most experts agree that it's important to focus on a long-term strategy and stick with target allocations. Then you don't have to worry about timing the market.
Compare this with what you think is an ideal allocation over the long term, depending on the amount of risk you can handle and the time period for which you're investing. We'll call this your "target allocation." Individuals who aren't close to retirement, and can handle moderate risk, can typically have half of their assets in stocks.
If your current stock allocation is less than your target, get into the market "in bits and pieces," says Pankaj Narain, Deutsche Bank India's director and head of private clients, banking and investments. "This spreads your risk a little bit."
Mr. Narain is referring to the practice of "rupee-cost-averaging," in which individuals invest small portions of their money over a period of time.
So, for instance, if you want to invest 1,00,000 rupees, split it into five (or 10) portions, of 20,000 rupees each, and invest each portion at specific intervals, say on the first of every month. That way, if there's a dip in the market over the next five months, you'll be able to catch the lower price. Alternatively, if the market rises, you will have locked in some lower prices early on.
As an example: Assume that the current net asset value or price of a stock mutual fund that you want to buy is 15 rupees per unit. If you invest all the money in it now, you pay 15 rupees per unit.
However, if you follow cost averaging, the average price of the fund unit will be different. If stocks decline over the next five months and bring down the fund price to 14 rupees, 13 rupees, 12 rupees and 11 rupees, then you've bought the fund for an average of 13 rupees per unit.
Alternately, if markets rise and the fund price goes from 15 rupees, to 16 rupees, 17 rupees, and 18 rupees and 19 rupees, the average purchase price is 17 rupees. In this case, the average price is a little higher than what you would have paid if you had invested all the money at once. But that's the price you pay for hedging against the possibility of a decline in stocks.
Individuals are best off investing in stocks through a diversified mutual fund that buys a number of stocks from different industries, as that again spreads your bets. Many mutual funds in India offer "systematic investment plans" that allow individuals to invest over a period of time.
People looking to make big bucks on stocks in a span of few months or a year may have lost their opportunity. Most market experts believe the worst of this downturn is over, so short term gains will be moderate from here.
Finally, a note for those whose stock allocation may have soared more than what they had planned: Consider selling some to come back to the original target. Use the sale proceeds to buy whatever is less in your portfolio, such as perhaps bond mutual funds.
Remember, when it comes to investing, most experts agree that it's important to focus on a long-term strategy and stick with target allocations. Then you don't have to worry about timing the market.
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