Is it a good time to invest?
This is a question everyone has at any given point in time.
When the markets are at a major low, fear prevails which prevents
retail investors from investing. When the market is at peaks, they
jump in due to fear of missing out aka FOMO. I am sharing some
data from the past. This is not investment advise per se. I want you
to go through the article, put on your thinking hats and do what
you feel right. If you feel you want to have a chat I’ll put my contact
details in the end.
The Dow Jones Industrial Average (DJIA) was first started on
May 26, 1896, by Charles Dow, co-founder of The Wall Street
Journal and Dow Jones & Company. The index was originally
calculated by adding up the closing prices of 12 of the largest and
most influential industrial companies in the United States and
dividing by 12. The first closing value of the DJIA was 40.94.
The DJIA has been modified several times since its inception.
In 1916, the number of stocks in the index was increased to 20. In
1928, it was increased to 30. The most recent change to the DJIA
was made in 1999, when AT&T was replaced by four new stocks:
American International Group (AIG), Home Depot, Intel, and
I have taken DJIA as a reference and you can check this is the
same for almost all the world indices except a few exceptions. 80-20
rule applies everywhere
Some observations on DJIA:
In almost 127 years, there were only 14 years when DJIA gave
negative returns (11%).
The number of negative years in a decade, has increased with time.
The number of consecutive negative years in a decade has
increased with time.
There is no guarantee you’ll get a negative year in every decade.
In most instances, the returns for next year following a
negative return was positive and more than the negative returns.
However, if someone held through the negative year the
loss would not have been covered the next year. If you are
wondering why, here is the reason.
Ideally one should not hold beyond 20% loss. If you are
too confident on the company you can hold till 30% loss and do
cost averaging by investing the same amount of money again in the
same stock with strict SL of 1%. In case of index people buy every
30% dip as history has shown us a new ATH is made every 3-5
Nobody knows how long it will take to recover your losses.
Past performance is not necessarily an indicator or a guarantee of
But past experiences provide three important takeaways:
1: Historically, the market has recovered from every drawdown,
even steep and prolonged declines. And it had continued to grow
beyond the losses incurred.
2: On average, it has taken under two and a half years to recover
market losses when severe declines occurred during the worst bear
3: Investors who sell out of the market during a drawdown and do
not reinvest may not recover losses.
It is most important to book profits at market peaks and also
reinvest the profits at market bottom or go for an SIP of 24-36
months from the profit booked in case you feel you are not
disciplined in reinvesting at major lows.
Investment horizon is the key. In case you are in your 20s or
30s and you are investing for your retirement, you don’t need to
worry much. However, when you are close to retirement, it is
suggested to keep 4-5 years of living expenses at least in fixed
income instruments with high liquidity.
Once you are retired, compounding is the least of your
priorities. Capital protection takes higher priority provided you do
not have passive sources of income which are inflation proof in
nature and independent of external factors.
“The Big Short” is a movie to watch whenever you feel the
market is overvalued and you feel FOMO to invest. I have talked
about equities here as it has clear data to refer back. Same is the
case for real estate. If you are buying at peak, you are paying a
premium on the actual intrinsic value and paying a higher interest
amount compared to someone who is buying when the prices are
at a major low. You can invest in REITs whenever you are not sure as
you don’t need to make a lumpsum investment.
It is your money. Cash is always king. Do not invest in
something because your friend is investing. The financial goals,
investment horizon, risk appetite, net worth may be different than
what it is for you. Free cash will let you grab an opportunity when it
comes compared to someone who is having a cash crunch.
I’ll end with a quote from Charlie Munger.
Patience is the Key. The big money is not in the buying or selling,
but in the waiting.
You need to wait for the right opportunity and once you have
acquired an asset you need to wait till it comes to a point where
there is no further growth possible. Retail investors do the exact
opposite and get trapped by the big players.
The views expressed on this account are my own and do not necessarily reflect the
views of my employer.
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