EQUITY MARKET - Even the unluckiest wins long term



What if you were the unluckiest investor in the world and invested at the peak of the market.
And not once but every time.
Short term, we know the an- swer--you bleed and lose a part of your investment. But what happens in the long run?
Do you still lose money or is there some truth in the saying that equity wins long term?
Mint Money explored this further and did some data crunching. Our numbers say that it's a win-win situation for you if you leave your money in the market for at least five years, even if you catch it at the worst possible time.

“It is well known that the buy-and-hold strategy benefits investors with a horizon of around five years, irrespective of when he enters the market,“ says Nitin Rakesh, chief execu- tive officer, Motilal Oswal Asset Management Co. Ltd.
How we did it To do this, we dug out re- turns from the Nifty index over the last 19 years, ending De- cember 2009. Then we as- sumed three worst-case invest- ment scenarios, which we fur- ther split over three time hori- zons--19, 10 and five years.

In the first scenario, we assumed that you ended up in- vesting Rs10,000 every year whenever the market was at its highest point that year for 19 years, 10 years and five years.
In the second, you got unlucky again and invested Rs10,000 every month, again when the market was at its peak, over the same three time periods. In the last scenario, you had a lump sum of Rs1 lakh, which you in- vested once over the three time periods but, unfortunately, you repeated the same mis- take--invested when valua- tions were the highest.

Here's how you would fare in the three scenarios over the time periods we've chosen.
Scenario I If you invested Rs10,000 ev- ery year for 19 years (1991 to 2009) in such a way that you caught the market at its highest point each time, you would have managed to gain an annu- alized return of 12.13%. In oth- er words, on an investment of Rs1.9 lakh, you would have earned an additional Rs4.53 lakh. Your gains on Rs1 lakh over 10 years (2000 to 2009) would have been Rs1.20 lakh or 16.69% annually.

In the last five years, when recession gripped the entire world, markets generated a reasonable 7.40% annualized return per annum on a similar investment.
Scenario II You wanted to distribute your investments well, so de- cided to invest Rs10,000 every month. But little did you know that your luck, or rather the market, would turn against you and you would end up invest- ing when the market was the most expensive each month.

But this still isn't a reason to grieve. Even after committing the same mistake continuously for 19 years, you would have gained 10.50% annually. Over 10 years, your annualized re- turn would be 14.76% and over five years 12.08% annually.
Scenario III We also calculated returns if you invested, say, Rs1 lakh only once over the three time peri- ods we have considered. But you made this single invest- ment when the market was at its peak. Even here, you stand to gain. Over 19 years, your re- turns would be 12.32% com- pounded annually, 11.47% over 10 years and 12.84% over five years.
What it means Equity works even if you are the unluckiest investor. The numbers say it all: even in the worst-case scenarios, you stand to gain. And over all three time periods.

Therefore, we can safely say that long-term equity investing can change fortunes even if someone enters the market at the worst possible time.

Ironically, few have the pa- tience to stay on. Any fall in the market sends investors in a panic. In fact, most of them re- deem their investment even at the cost of incurring a loss.
Says Rajan Mehta, executive director, Benchmark Asset Management Co. Pvt. Ltd: “His- tory shows that people over- react and end up making wrong decisions... Most of them are wiser only in hind- sight.“

While our data shows that any time is a good time to enter the market provided you stay the long term, people often lose out in an attempt to time the market over short periods. THE LONG RACE Even the unluckiest person, who invests when the market is at its peak each year, would stand to gain, provided he keeps his money in the market for five years.

source;livemin