Investing for the long term

Jayant Pai | jayant@ppfas.com

A friend of mine is considering discontinuing his Systematic Investment Plan (SIP) program. I was surprised to hear this because when he commenced it last September he was resolute that he would invest every month for a period of 25 years (yes, 25, no less…!).

When I inquired as to why he had decided to change course mid-way he gave me three reasons : 1. The broad indices had slipped below their 200 Day Moving Average (DMA) (2) There were too many “negative events” happening worldwide currently. (3) Some of his analyst friends had indicated to him that corporate earnings would be downgraded leading to a P/E de-rating.

He said that he would resume his SIPs once the market stabilised.

He looked hurt, when instead of admiring his prudence I rebuked him for his decision. My contention was :

1. Sure, the indices are currently below the 200 DMA. But how does that matter when your investment horizon is 25 years ? Over that period, the indices will bounce over and under this average several times. In fact the longer it stays below, the more units you will be able to accumulate through your SIP program. Besides, what is so sacrosanct about the 200 DMA alone ? It is after all, just one more moving average tracked by technical analysts. These averages are a derivative of prices and not their forerunner, just as the 20 DMA, 50 DMA, 100 DMA and so on…

2. I reminded him that six months ago, he wanted to invest a huge lump-sum in the market, as it was doing very well at that time. At that time my point was that valuations were stretched and by investing at one go he was not only exposing himself to the prospect of heavy losses once markets corrected but he would also be bereft of gunpowder (read, money) in order to capitalise on the fall. By initiating an SIP program he would be able to substantially reduce this threat. As he had listened to my advice at that time he was now having the resources to invest in a falling market. He should rejoice over this fact rather than be dejected.

3. Markets will always be hostage to some event or another. And most of the time we will not know the outcome of these events as they unfold. As Donald Rumsfeld once remarked, “There are known unknowns and there are unknown unknowns”. An earthquake in Japan may be considered a known unknown as it is prone to such events (although the magnitude will only be known after the event). But an uprising in the Middle East may fall in the second category as not many foresaw the sudden fall of royalty/dictators who were well-entrenched for several decades.

The penchant for waiting to invest at “the right time” is often the biggest roadblock to wealth creation. In fact SIPs have become popular over the years as they take the emotional aspect out of investing.

Hence I suggested to him that he continue his SIPs and also stop watching too much TV…..


1 Comments

  1. I would think that the main point of SIP is one overcomes the behavioral hurdle of timing the market and avoids the herd like mentality of buying and selling with the herd but it seems that this hurdle and herd mentality is so overwhelming that an investor who has committed himself to SIP wants to pull out when he should be as you rightly say be investing more !! Parag’s book on Behavioral Finance is a must read.

Leave a Comment.