Discontinuing Monthly
SIP Equity Investment when Stock Market is going down!!!
Investor’s
Query: With the euphoria of this dyeing UPA II
(>18000), I think that we should take a break from my Monthly SIP equity
investment of Rs. 40,000/- and wait till things settle
down? What do you advise..
Mr. Gerard Colaco: Once you have embarked upon a systematic investment programme, whether in stocks or through mutual funds, the most important factor is to stick to your investment programme, regardless of market levels. If you alter the program you are trying to time the market. This may not be a good idea.
I will certainly agree that when investing a lump sum, it is certainly advisable to invest only when there is a margin of safety. Our thumb rule for the margin of safety is when any popular diversified stock index is at least 25 percent below its last peak. But the margin of safety is applicable only to lump sum investments, not systematic investments.
Charlie Munger, Warren Buffett’s partner of long standing, puts it well when he states: “It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings, without expecting miracles, is the way to go."
John Bogle, who is probably the ultimate authority on mutual fund investment, says: “Stay the course. No matter what happens, stick to your investment programme. I’ve said “Stay the course” a thousand times and I meant it every time. It is the most important single piece of investment wisdom I can give you."
On 25th April 2003, the BSE Sensex was 2,924 points. Just nine months later, in January 2004, the index crossed 6,000 points. Never before in the history of the Indian stock market, had the index doubled in a period of slightly less than 9 months. A number of stock market pundits urged investors to book profits. Many did so. Several systematic investors also stopped their SIPs. Most of these then missed the spectacular bull run in the next four years, which propelled the index from 6,000 points to 20,873 on 8th January 2008.
So my advice is simple – stick to your investment programme. If you think that there is some risk in the market because of political or other reasons, you may scale down your Rs. 40,000/- commitment to a Rs. 20,000 commitment. This is not my advice - it is only that I have no problem if you halve the monthly investment. But I would certainly not advise stopping the investment programme totally.
Mr. Gerard Colaco: Once you have embarked upon a systematic investment programme, whether in stocks or through mutual funds, the most important factor is to stick to your investment programme, regardless of market levels. If you alter the program you are trying to time the market. This may not be a good idea.
I will certainly agree that when investing a lump sum, it is certainly advisable to invest only when there is a margin of safety. Our thumb rule for the margin of safety is when any popular diversified stock index is at least 25 percent below its last peak. But the margin of safety is applicable only to lump sum investments, not systematic investments.
Charlie Munger, Warren Buffett’s partner of long standing, puts it well when he states: “It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings, without expecting miracles, is the way to go."
John Bogle, who is probably the ultimate authority on mutual fund investment, says: “Stay the course. No matter what happens, stick to your investment programme. I’ve said “Stay the course” a thousand times and I meant it every time. It is the most important single piece of investment wisdom I can give you."
On 25th April 2003, the BSE Sensex was 2,924 points. Just nine months later, in January 2004, the index crossed 6,000 points. Never before in the history of the Indian stock market, had the index doubled in a period of slightly less than 9 months. A number of stock market pundits urged investors to book profits. Many did so. Several systematic investors also stopped their SIPs. Most of these then missed the spectacular bull run in the next four years, which propelled the index from 6,000 points to 20,873 on 8th January 2008.
So my advice is simple – stick to your investment programme. If you think that there is some risk in the market because of political or other reasons, you may scale down your Rs. 40,000/- commitment to a Rs. 20,000 commitment. This is not my advice - it is only that I have no problem if you halve the monthly investment. But I would certainly not advise stopping the investment programme totally.
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