2020 has been a year that will remain etched in our memory for a long time. The pandemic caused by COVID-19 has pulled the reins of economies around the globe. Most investors are experiencing at least 20 to 30 per cent losses and have been wondering if they should invest further or redeem and wait for the markets to recover. After witnessing the recent slump in stock markets, should you consider long-term investments? Let us find out.
There are a few things that investors need to remember while investing during a crisis:
Although the pandemic might be unprecedented for us, markets are not alien to a crisis. If you turn the pages of history, you will find that globally, markets have survived various crises like natural disasters, wars, terror attacks, and bounced back stronger. Let us turn back the pages of history and look at the performance of the markets over the past 25 years. Here is a glimpse into the performance of Sensex:
As you can see, the markets have seen quite a few slumps since 1994. However, over time, despite the Asian Currency Crisis (1997), the 9/11 disaster (2001), the Global Financial Crisis (2008), the US Sovereign Rating Downgrade (2011), China’s Economic Slowdown (2015), and the COVID-19 (2020), the Sensex has multiplied nearly 10 times.
Hence, if history is to be considered, then regardless of the market cycles, equity might seem volatile in the short-term but has the potential to generate wealth over the long-term.
When economies go through a slump, businesses with strong fundamentals will be the ones that will survive. Hence, investors must consider investing in such businesses.
While stock prices might seem lucrative right now, investors must be careful before they go bottom-fishing. They must research the security carefully before investing.
Any crisis is usually accompanied by a lot of false news and rumors of takeovers or shutdowns. Investors must ensure that they research well before believing any such news and look at information from credible sources only.
The country has been in lockdown for more than a month. Most businesses have not generated revenue and have absorbed employee salaries as losses too. Therefore, when the economy starts returning to normal, these businesses will have some ground to cover before they start being profitable. Also, a crisis usually impacts the spending power of people. Hence, many businesses might have to offer discounts or restructure their products to meet the low-cost needs of their customers. This means that the recovery time might get longer.
Therefore, if you are looking at investing in a stock or a mutual fund, then you need to allow companies and the economy the time to recover. While putting a number here will be mere speculation, a five to seven-year horizon is a reasonable time frame within which most strong businesses would have recovered their losses and started earning profits.
Couple this with the fact that good quality stocks are currently undervalued, you have the perfect opportunity to invest in such stocks with a long-term investment horizon. There are three reasons to do so:
The strong fundamentals of the company will ensure that the business sustains the impact of the pandemic
The undervalued price due to the market crash will ensure that you buy more stocks for the same amount of money.
Over 7-10 years, your returns graph will look exponential if the company manages to capture the new needs of the market.
Also, irrespective of market conditions, investing in equities, whether its direct stocks or equity mutual funds give results only when done with a long term perspective. Continuing SIPs would allow you to invest small amounts at regular intervals and free you from market timings. This means that for the same amount, you get more units when the markets are down and less when the markets are high. Hence, if you plan your investments now, you will be able to accumulate more units in the long-term.
Fear and panic are the natural reactions to a crisis. However, while investing, ensure that you stick with the facts and avoid making any emotional decisions.
Many investors are trying to speculate the industry segment(s) that will thrive after this crisis tides over. While that might be fun, investing your money based on speculation is usually a counterproductive tactic. Instead, stick with strong companies and give them the time to recover and offer good returns on your investment.
The author is the Co-founder, and COO, Groww