{"id":18295,"date":"2020-04-06T15:30:25","date_gmt":"2020-04-06T10:00:25","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=18295"},"modified":"2020-04-08T13:19:24","modified_gmt":"2020-04-08T07:49:24","slug":"how-to-invest-in-the-current-markets","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/mf-research\/how-to-invest-in-the-current-markets\/18295","title":{"rendered":"How to Invest in the Current Markets?"},"content":{"rendered":"

In our last article here<\/a>, we had explained with simple maths, on how the potential future returns from equities at this juncture can be significantly high.<\/p>\n

Further, at the current levels (i.e close to 35% decline), valuations have also become very attractive (as measured by Marketcap\/GDP, Price to Book and Price to Earnings multiple).<\/p>\n

So while this can be a great time to increase your equity allocation, the only problem is, we don\u2019t know whether there can be a further fall and how deep it can go before the eventual recovery.<\/p>\n

That leaves us with..<\/p>\n

The Second Important Question<\/b><\/h4>\n

How do we invest in equities now as the cash or the debt portion (to be tactically allocated to equities) is a scarce resource and we want to make the most out of it? Should we invest in equities all at once now or stagger it?<\/strong><\/p>\n

This boils down to managing two objectives<\/p>\n

    \n
  1. Wanting to look right after 3-5 years<\/li>\n
  2. Not Wanting to look \u2018dumb\u2019 for the next 6-12 months<\/li>\n<\/ol>\n

    The steep correction in prices, low valuations and earnings growth cycle at its bottom, indicate high chances of looking right after 3-5 years in terms of equity returns.<\/p>\n

    While objective 1 looks achievable, the real problem comes when we simultaneously want to achieve both 1 and 2!<\/p>\n

    Not wanting to looking \u2018dumb\u2019 for the next 6-12 months means, to wait and deploy the entire amount at the market bottom. Unfortunately we don\u2019t have an answer to how much further decline is left.<\/p>\n

    Given this constraint, to manage objective 2, we need to take a regret minimization approach. We need to balance between two regrets –<\/p>\n

      \n
    1. Entering now only to see your portfolio decline further – Regret of not having waited just a little longer<\/strong><\/li>\n
    2. Market recovers, it never declines to your expected levels and you completely miss the opportunity to invest – Regret of not having invested earlier and waiting too long<\/strong><\/li>\n<\/ol>\n

      The deployment plan will have to be designed depending on which one will lead to greater regret for you.<\/p>\n

      Once you decide on the above, we need to make some reasonable assumptions based on past market crashes.<\/p>\n

      Let us start with the extreme assumption of 60% fall. How likely is that?<\/b><\/h4>\n

      Periods with greater than 60% decline from the peak<\/p>\n\"\"<\/a>\n

      In the last 40 years, there have been only 4 days<\/b> where the Sensex <\/b>went below the 60% fall<\/b> levels<\/b>.<\/p>\n

      You read that right – just 4 days!<\/p>\n

      Since the odds of such an occurrence is very low, we would not want to wait till a 60% correction happens.<\/p>\n

      How about a 50% fall. How likely is that?<\/b><\/h4>\n

      Periods with greater than 50% decline from the peak<\/p>\n\"\"<\/a>\n

      In the last 40 years, there were only 3 bear markets (1992-94, 2000-04 and 2008-10) where the markets fell more than 50% from the previous peak.<\/p>\n

      Further, whenever this happened, the markets<\/b> stayed at levels below 50% decline <\/b>for only 2-4 months<\/b>.<\/p>\n

      This means a 50% decline is a very rare occurrence and is usually extremely short-lived (lasted only for 2-4 months). There is also a good chance that these levels are never hit and the markets recover before that.<\/p>\n

      Given our inherent human tendency to get anchored to the 50% decline level (no idea why), we may keep waiting and miss out on the opportunity to enter equities as usually the recoveries are extremely fast (sample this – in the 2009 recovery, the market (Nifty 500 TRI) went up by 86% in the first 3 months).<\/p>\n

      The fact that the current fall happened from much lower valuations compared to 2008 – also needs to be kept in mind. The current valuations as measured by MCAP\/GDP and Price to Book are already at the 2008 lows. In other words, since the beginning valuations were not as expensive as in 2008, a 35-40% decline will bring today\u2019s markets to similar levels which a 50-60% decline brought to the 2008 markets!<\/p>\n

      So we would not want to wait till a 50% correction to deploy a majority of our cash.<\/p>\n

      How about a 40% fall. How likely is this?<\/b><\/h4>\n

      Periods with greater than 40% decline from the peak<\/p>\n\"\"<\/a>\n

      The longest <\/b>period for which the markets have stayed <\/b>at levels below<\/b> 40% decline<\/b> is 1 year 5 months<\/b>.<\/p>\n

      Excluding<\/b> the bear market<\/b> of 2000-04<\/b>, the longest <\/b>the markets have stayed<\/b> at levels below 40% decline <\/b>is 6 months<\/b>.<\/p>\n

      A few days back, the markets were within touching distance of a 40% decline and hence the possibility of the markets touching these levels again cannot be ruled out.<\/p>\n

      Making sense of the past<\/b><\/h4>\n

      So putting all this together, these are our takeaways<\/p>\n