Investing @ 33000.........

Even as we celebrate yet another day of strong gains in Equity markets, a question that crops again and again: 

Whether the equity markets have run up too much too fast? Nifty is up 25% YTD whereas, Mid Cap indices have grown even faster at 36% YTD

Let’s start by looking at some facts about the stock market

1. The stock market is strongly correlated to the growth in the economy.
2. The stock market is more volatile in the short term, but much less so when the holdings are for a longer term.
3. As you can see, stock market returns become a lot more predictable as the holding period gets longer

Of late, the measure of Market Capitalization / GDP is gaining popularity for overall stock market valuation. On this basis too, the market is not cheap.

What conclusions can we draw from all of the figures?

1. The stock market averages are not cheap now
2.  In many cases, the indices are well above sustainable growth rates in earnings
3. Froth is building up in some sectors, quite definitely.

Does this mean that we should avoid the stock market?

By no means We are only suggesting being careful about what we buy, how much of it we buy, and with what expectation and time horizon we buy.

Here are some basic facts:

1. In a country like India, which is expected to grow at a real rate of anywhere between 6.5% to 7.0% over a reasonably long period, it is not a good idea to stay away from equities
2. The stock market’s total return (including dividends) would be roughly equivalent to the nominal growth in the economy (specifically, the growth in the industry and service sectors)
3. This growth in the stock market DOES NOT happen in a straight line
4.  IT IS IMPOSSIBLE FOR ANYONE, ABSOLUTELY ANYONE, TO CORRECTLY PREDICT WHEN THE STOCKS RISE, OR WHEN THEY WOULD FALL
5. If you would have noticed the last 10 year returns of the Nifty50 is 7.4% while debt funds have given around 200 bps over and above this.
6. Therefore always have a reasonable mix of debt and equity in your portfolio of financial assets. Never go overboard on any one asset class.
7. Above all else, respect efforts of your good Investment Advisors for keeping your funds on a disciplined investment path even as market temptations may push us in other directions.

Do Remember...

“The stock market will continue to be essentially what it always was in the past-a place where a big bull market is inevitably followed by a big bear market. In other words, a place where today’s free lunches are paid for doubly tomorrow.”

- Benjamin Graham