SIP investment: Why you need to accept losses

are indeed low

To create wealth from stock markets, one should stay invested.

By Dhruv Desai

It is a good practice to remain invested in a falling market or better still, invest more to ensure great returns when market recovers. Majority of the investors would know this but unfortunately, majority of them fail to stick to this advice.

To create wealth from stock markets, one should stay invested. Likes of Warren Buffet, Rakesh Jhunjhunwala didn’t become rich overnight. They have seen all ups and down in the market and had managed to stay invested. In fact, they managed to invest when the market was at the lowest or at least the stock was trading cheap.

Stay invested
When we buy the stock for long term, we feel we will remain invested or invest more when the market falls. But do we actually do it? Let us take an example : Suppose we start systematic investment plan (SIP) of Rs 1,000 every month in HDFC Equity Fund from January 2007. I am taking this year since the market before that was roaring and that would convince many investors to start their investing in the stock market. From January 2007 to January 2008, the returns would be 29.68% where we would have invested Rs 13,000 and we would be getting a return of Rs 16,859. Then in October 2008, the investment would be worth Rs 13,370 from an investment of Rs 22,000. So we would be looking at a loss of 39.22%.

I doubt if any investors would still continue their SIP. I have seen many investors taking a loss and withdrawing from market stating stock market is not meant for them. In fact, if they had continued for another year, i.e., till December 24, 2009, the return would be Rs 53,533 and amount invested would be Rs 36,000 which would give us the return of 48.70%. In fact, if the investor would have continued the same SIP of Rs 1,000 every month, the return currently would be Rs 3,35,060 from an invested amount of Rs 1,43,000. That would give a return of 134% in a span of 10 years.

Investor’s confidence
Falling market tends to shake off investors’ confidence in the market. This is psychology, where fear prevails common sense. When the market is touching new highs, in spite of a warning from the back of our mind that the market is overbought, greed prevails and we find ourselves over committing in the market.

Investors should remove the notion from their mind that equity market will give high returns no matter what. We have seen where in a span of one year, the return was negative 39.22%. It is a volatile asset class and will remain so. Investors need to accept this. Investors who have seen high returns in past are less likely to be swayed by fear compare to investors who have seen low returns in past.

In rising markets, it is easy to say we will remain invested when the market falls but when it really falls, investors tend to crash out and take a loss rather than seeing it as an opportunity to invest more. They feel that the market will fall further and then they will invest. But it is impossible to time the market or catch low. In fact, even if they are getting cheaper stocks, they will wait more in fear that it will fall more.
My aim in this article is to highlight that one needs to accept losses too when doing their SIP. If your tolerance is low in the falling market, teach yourself to overcome your fears when things get bad. Otherwise, you will miss the opportunity of investing when prices indeed are cheap.

[“source=forbes]