Investors are always so busy celebrating market highs that they miss the peak out moment. So, most investors tend to wake up long after the market corrects. The only way to ensure one is alert to the market highs is to follow an active-passive approach that is dynamic.
This requires skill, concentration, analysis, process discipline, and action. If these are not put in constant play, active management as a business will end up underperforming very badly. So, the underperformance we now see in the active management of large-cap mutual funds is not accidental. It is the outcome of long years of gradual decay, process degradation, and indiscipline.
Large-cap mutual funds are merely a classic example. And, a very glaring one at that. Advisors and investors run an even bigger risk by being passive over such actively managed mutual funds. The future is definitely not going to be as easy as the past. The message for investors is clear. Active Portfolio investing is fast becoming complicated.
The choice is to beat that complication through a superior investment process or to accept the ordinariness of index investing. This is an hour to make choices on what works for you.
When markets reach all time highs we are always told SIPs are the best way to invest in equity. Just starting an SIP is seems as a formula for success. Initially, this works extremely well. But, when markets peak out, the problems begin.
While all of know SIPs are a Great way to deploy money into equities, not all SIPs end up being successful. The SIPs started in tech in 2000 and infra in 2007 never really did well. They failed to earn positive returns for years and actually may not have compounded enough to beat long term inflation. Investors who stopped them in sheer vexation never returned to markets for many years. What went wrong? Afterall, a good number of investors did well with SIPs during the same phase. What makes some SIPs tick?
While SIPs are good, choices are critical. Choosing in which part of he market your SIP must run is very critical. While it looks simple, it is not easy. The reason is the manner in which we arrive at our choices. We mostly choose the funds which show the highest returns over he recent past. This often leads to our buying SIPs into funds when their peaking out and then continuing them when they lose sheen. But, does this happen only to us?
Strangely, around market peaks, most Indian investors choose to start SIPs only in the wrongly chosen funds. This Makes them easily disheartened.. Often, investors drop out midway never to return again.
What cause the idea of SIP To fail ? One needs to understand that while SIP is a healthy way to invest, choices must be extremely carefull. We should choose funds that will do well over very long periods of time.
At the time of choosing, you are likely to see several better performing funds. This will tempt you heavily to invest based on past performance. Often, funds chosen this way tend to fade away conceding most performance gains easily. Often we see these SIPs even dipping into losses. It is chooses funds which provide a sustainable long term performance. While looking at them we must choose with the intent of ensuring a long relationship and enduring faith.
Placing faith in your investment is crucial. Placing faith in the right choices is critical.
Market cycles tend to constantly throw challenges at investors. When markets are at cyclical highs, it is extremely difficult to sell and exit. When markets trade near cyclical lows, taking a bold investment call is near impossible. When the markets trade on an uptrend, we tend to keep buying more as the trend grows to its strongest point. Most buying happens around the strongest point and buying momentum refuses to slow down for a while.
What we have seen in early 2018 typified this behaviour. As we are seeing now, the trend slowly changes or breaks down, but investment behaviour refuses to change or adapt as quickly. When the trend breaks down completely, we usually struggle to adopt newer strategies. Our liquidity may be low and the scope to reorient portfolios is also minimal.
The sensible approach would be to gradually reorient portfolios as the trade turns. The markets will give enough time and there would be enough liquidity to buy as well. When extreme lows are hit, the exercise would be near complete and the portfolio will be forward-looking. Investing strategies need to change towards the future and gradually align portfolios with the emerging scenario. This can work well only with a graded approach.
A new financial year brings along newer opportunities and challenges. A financial year which follows an extremely profitable investment year will always have the challenge of delivering comparable performance. After a good year, we expect the next to be even better.
But, when the year gets progressively tougher, then the closing mood sets the tone for the year ahead. If the mood is glum at the beginning of a new year and the follow-up events promise more uncertainty, then the statistics of the previous year will have little or no meaning for the year in store. We seem to be in that phase where the past year really has no bearing on the upcoming one.
So, we need to put behind the past and pragmatically view the future. The future certainly does not promise to be easy and predictable. Actually, it looks far more complex than the previous year.
The alignment between global and domestic markets worked perfectly last year. Towards the close, we seem to be preparing for a year when this compact will definitively be broken. Domestic investor confidence will be tested in the coming year. Early indicators are not as promising with clear signs of a behavioural crack very much visible among domestic investors. If they further lose their faith in Indian equities, we are likely to see our markets come under severe strain. We already know the stance of global investors. They don’t seem to be inclined towards Indian equities. If the strong domestic appetite weakens, we could see the challenges mount for our markets. The wall of fear to be climbed will look suddenly taller.
The first quarter will set the tone and context for the upcoming financial year. Investors must be ready and willing to see the challenges mount and still be willing to make use of opportunities that come their way. General elections are scheduled for May 2019. Advancing them will make the financial year 2018-19 very eventful, interesting and challenging.
“For last year’s words belong to last year’s language and next year’s words await another voice.” – T. S. Eliot