HOW TO #INVEST IN TURBULENT TIMES

What an investor generally wants ?

The obvious answer which would come to mind is Returns. However, there is something much more desirable by investors. Investors want certainty. Certainty of performance or returns.

What is certain?

Well the answer is Uncertainty. Nothing is certain and the recent past has aptly reinforced that belief. However, uncertainty is nothing new and has been omni-present since time immemorial.

A famous person once said, “Embrace uncertainty. Some of the most beautiful chapters in our lives won’t have a title until much later.”

When it comes to investing, those who navigate the uncertainty successfully find themselves disproportionately rewarded. Some of the most profitable investments in our lives won’t have returns until much later. It is the time that matters and not the market timing. Unfortunately, a lot of us worry only about market timing and what will happen in the near future. One rarely does talk about staying long in the market. It has been historically proven as shown below.

Market falls and subsequent returns (compounded annualized %):

As we can see, the uncertainty has only added to attractive returns on long periods of time.

Normally, periods of uncertainty are preceded by times of euphoria during which markets rally and deliver attractive returns. Time and again, we find the markets correcting its euphoria, either triggered by events or by periods of subdued or low returns. What history has shown is that, irrespective of market levels, if we have consistently invested on any particular day, say even your birth-date, every year for a longer investment horizon, you would have been happy to see the returns you would have made. It is the time that matters, not the timing.

IN LONG-TERM, EQUITIES OUTPERFORM EVERY OTHER ASSET CLASS

As the above chart clearly shows, the real returns delivered by stocks have clearly outperformed every other asset class. Even a small percentage difference can mean a fortune when compounded over long term. In the above chart, $1 has multiplied about 704,997 times in stocks as against 1,778 in bonds and just to about 4.52 times in gold. We can safely say that only stocks have beaten inflation handsomely over long periods as against say gold or bonds which have just about managed to deliver similar returns as inflation. We can also see that the stocks returns line is also very volatile in shorter periods as compared to other asset classes. However, in longer periods of time, the trend always has been a rising one.

WHICH ASSET CLASS MAKES MORE SENSE?

By nature, both are very different animals. Debt products, primarily say bank deposits, carry the promise to return the principal amount upon maturity in addition to paying interest rates to the depositor. By itself, deposits are not productive unless it is loaned to businesses at a higher rate, the margin being the bank’s profit. Businesses take loans to invest in businesses which would generate higher returns than the interest rates payable by them and much higher than the bank deposit rates. The simple question to ask here is, is it not wise to invest in businesses who hope to generate say 4-5% extra returns than invest in say bank deposits? If the businesses are not able to generate higher returns, are the deposits with banks safe?

Wealth creation is happening only through equities. Debt has managed to only deliver returns comparable to the inflation, meaning your wealth effectively remains stagnant. The disparity of the debt and equity returns over long periods of time shown in the above graph is proof of this fact. It does make a lot of sense to be business owners in multiple businesses through equity mutual funds for longer investment horizons. Not just the US, but studies across many countries, both developed and developing markets, have shown similar results.

However, the risk in equities comes with volatility in short periods of time. If you are able to go through the turbulent times, handle the volatility and not get disturbed with uncertainty, you will most likely emerge successful and create wealth over time.

Note : Adapted from excerpts of the interview “Investing in Turbulent Times” by Mr. Neeraj Choksi (Jt. MD, NJ Group).