Mint, the newspaper carries a headline today…”A lost year for markets as all 2019 gains erased“. They are talking of the index, of course. However, for an investor in mid or small caps, not just the gains from 2019 but those from a couple of years too have evaporated.
This is painful and scary. No one likes losses, even if they are temporary. In general, our minds are not attuned to the red ink. But that’s a fact.
Several of your stock investments will tell you the same. Companies have disappeared, or hit multi year lows and continue to do so. There seems to be no bottom for them. You keep saying “YES”, but it only responds “NO”. 🙂
Let’s take the mutual funds you invest in. A mutual funds is a diversified portfolio of stocks. They are not immune to the situation and hence expected to suffer less. But suffer they must!
The data speaks too.
Note: The base data for this analysis is sourced from ValueResearch and includes only regular plans as they have the data for over 10 years. Data is as on Sept 18, 2019.
Here is what I have found out.
There are 217 equity mutual funds that exist today. Out of which 139 mutual funds have an existence of over 10 years.
In over 10 years of existence, these funds have had, on an average, 30% loss years. Yes! That is, 3 to 4 years of negative returns.
The infrastructure fund variety has delivered upto 5 years of negative returns in the last 10 to 12 years.
The worst case is loss in 50% of the years of existence and the best case is 17% years in red – no equity fund escapes losses.
While that is for individual funds, let’s see how the numbers tally on an annual basis. In 2008 and 2011, all equity mutual funds, delivered a loss.
In 2015, 36% funds (of 201 funds) had a red mark. Calendar year 2018 pegs the number at 82% (for 217 funds).
No, you really can’t escape losses, not without having special insights into the market or you get Mr Market to spill out its next moves, ahead of time.
Some people may get lucky with it once or twice but that is unlikely to be a long term strategy.
So, how do you protect yourself from this ‘losses’ phenomena?
#1 Don’t invest in the markets and as a result, you don’t become witness to the number in red. However you may probably have to work harder to save more and provide for the invisible loss caused by inflation.
#2 Plan yourself well. Your financial plan cash flows should take into account the fact that the investing journey will not be a linear and smooth one. There will be losses from time to time, mostly, temporary. Save and invest accordingly.
#3 Focus on your asset allocation. Spread across various investment instruments to diversify and not diworsify. Again, this will help minimise the loss.
In a recent simulated retirement plan, while the portfolio faced equity loss years in about 30% of the retirement period (sometimes consecutive years of losses), the investor portfolio faced losses in just 8 to 9% of those years. Thanks to asset allocation. The plan demands only 20% equity exposure.
#4 Finally, remember the old saying which I repeat for the Nth time. Be fearful when markets are greedy and vice versa.
You act the opposite. That’s not helpful.
Look at it objectively. Know that if you are an investor currently in your accumulation phase, what you invest today is hopefully going to provide you better results. Run the numbers.
Post Note: It goes without saying that your selection of mutual funds is done right and not ad hoc based on star ratings or rankings. They are designed to distract.
Between you and me: Are you worried about your losses? Besides the frowning and standing aside, what are you doing about it, objectively?
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