View on the Market: From these levels it is unlikely that the markets will fall much. As always, stocks and indices can move up or down 10% in either direction without a real reason. Like you, everyone is waiting for the market to fall so they can invest at better value. Any 2-3% fall will keep getting bought into, cushioning a substantial fall in the short to medium term. A scenario where markets can fall in a meaningful way is if earnings for the next few quarters do not improve @ 15% +, on average.

Imagine a situation where you get these stocks at below prices, 4 months from now

18-Apr-17 18-Aug-17 Change
Tata Motors 444.10 158.23 -64%
Reliance 1370.45 660.90 -52%
Larsen & Toubro 1671.15 873.38 -48%
HDFC 1480.00 886.14 -40%
Infosys 922.40 628.69 -32%
SBI 290.15 204.22 -30%
Asian Paints 1040.95 756.58 -27%
HDFC Bank 1445.75 1174.17 -19%
Maruti Suzuki 6132.00 5311.48 -13%
ITC 278.95 245.95 -12%

About 9 years ago (in the 2008 crash), in percentage terms this is how much these blue chips corrected (between 1 August 2008 to 1 December 2008).

Over the next 6 months from 1 December 2009, the same stocks gave the following returns:

Stocks Change
Tata Motors 98%
Reliance 82%
Larsen & Toubro 70%
HDFC 53%
Infosys 42%
SBI 43%
Asian Paints 27%
HDFC Bank 42%
Maruti Suzuki 89%
ITC 13%

Were there people who made money in this crash and what happened thereafter. Of course there were. In fact, fortunes were lost and made.

Here’s the order of those who made money in that crash:

  • Those who went short on the market before crash/ long on the market after the crash – At best this was a stroke of luck for most, at worst, lack of knowledge.
  • Those who had cash after the crash – this is an option you can plan for. At any given point of time, a certain percentage of your portfolio should be earning a fixed 9%.

I don’t for once doubt that even passive investing in the Nifty ETF will deliver you ~14% y-o-y return over a longer term; my point is that the 2nd option above is an easier way to beat this 14%.

Fixed income investing is not about 9%. It is about having the ability to make fairly enhanced returns in a crash year. This 9% could grow 40-50% in a single crash year and that’s what stock investing is all about.

The criticism here is that you never know when to withdraw from fixed income funds and move to equity funds or stocks. The answer is never! Once you believe in this ‘Never’, you will know when the time is right. The newspapers will have stories ranging from corporate bankruptcies to bank failures and often of people ending their lives. Sad as it may sound, such are usually the times when big money is made.

Setting a discipline in percentage terms (i.e. @10% -20%- 30% fall in the market) almost never works. What works is the discipline to keep investing in fixed income from time to time and to balance your portfolio at least once a year in a preset ratio between fixed income and equity – this is called core portfolio management.

It is not that 9% annualized tax free return is the best that you should aim to do. On the contrary, a fund making this much gives you a good chance of reaching that 18% mark without necessarily using a super smart financial adviser, even if the latter is the most advisable way of going about your investments.