2018: Lessons from The Year Gone By
Source/Contribution by : NJ Publications
If one has to describe the year 2018 for financial markets in one word, it would be 'volatile'. As we have known, markets tend to be volatile in short periods of time and 2018 was not surprise. The year saw both the Indian and the global markets having bouts of volatility. As we come close to this year, perhaps we can draw a few lessons and refresh ourselves of what will soon be history – year 2018.
The year's market fluctuations had multiple reasons. Market volatility also saw it's impact on the investor's returns. The reasons include, weak global markets, US and China trade war, slowing earnings growth, increase and decrease in oil prices , state elections, ongoing tiffs between RBI and the Central Government and so on. The year saw the Sensex at an all time high of 38,989 (29th August) and at a year low of 32,483 (23rd March), moving in a range of over 20% during the year. As the year comes to a close, the markets are around 36,100 levels compared to the year's start of at 33813. With all the volatility, the year is still closing on a positive note with an increase of over 6.5%. The graph below will shows how the BSE Sensex has moved this year.
There one thing which has been keenly observed this year and its' about investor behaviour. The intermittent market swings did not dissuade the investors and instead they seemed to have become more mature. There have been incidents when the market didn't over react to a certain news and also bounced back quickly after some knee jerk reactions. One such instance was observed recently on 12th December when news of BJP loosing all three states and the RBI governor resigning came. When everyone would have thought the markets will tank, the opposite happened and the markets closed much higher for the two action filled days. This showed that nothing is truly predictable in the markets in short term.
The volatility and jolts did affect portfolios and returns.
When one takes a narrow look at the returns for 2018 alone, a lot of portfolios may have underperformed compared to expectations. This is not new in equity markets and hence it is important to understand that in the long term, the effect of volatility is smoothened out as we can see from the broader indices. As investors, we are sure that for our readers, the focus continues to be on the long term investment. Markets will always be volatile, sometimes more and sometimes less, especially in the short term.
Thankfully, the year did see more maturity from investors. Instead of investors shying away from investing in the market, investors continued to prefer the SIP route to investing which actually works best in markets with high volatility. The mutual fund SIP investments in November 2018 rose by 35% to Rs 7,985 crore, from Rs 5,893 crore in November 2017.
Similarly SIP investments from April to November 2018 rose by 48% to Rs 60,457 crore, from Rs 40,780 crore during April to November 2017.
Apart from retail investors, both the foreign and domestic institutional investors have also remained positive about the Indian economy, irrespective of the fluctuations in the stock market.
During the times when the market price of your investments is falling, one should remember the rule of the ace investor Warren Buffett. The rule is, when the market prices of your investments are falling, you should increase your investment more as you can now by the same investment at cheaper rates. The same rule can also be observed in the average price rule. The average rule basically helps you take advantage of the volatility.
Obviously this is considering that you are investing in the right asset class for the right time horizon, keeping your risk profile or portfolio asset allocation in mind.
To end, let us again remind ourselves that the equity markets are bound to be volatile in short periods of time like say one year. Evaluating anything and making judgement over short term is really not in the best interests of anyone. If the markets where volatile, that is how they usually are in short term and are again likely to be volatile for year 2019 as well. As investors, we should just learn from the markets and keep our conviction in long term growth story of India.