US economy continues to weaken
with major bailouts, trillion dollar cash infusions and considering the
general elections just around the corner, many investors might be
worried on whether they should be investing or staying on the sidelines.
should investors do for this
year? A very alluring idea would be to hold cash - redeem your holdings
wait for the dust to settle before going back in again. However, we
investors not to adopt extreme strategies in their investing - selling
everything to hold cash in the face of bad news has always seemed to us
extreme a measure to take.
are a few issues to consider,
although it would initially seem to be prudent to adopt the strategy of
holding cash under extremely volatile conditions. The first issue is
opportunity cost of holding cash. Interest rates are extremely low
(interest rates offered by the banks on savings accounts are 3.5% per
If the same amount of money could have been invested into other asset
which may have yielded a higher return, then the opportunity cost of
only cash would be very high.
second issue lies with
inflation. Some may argue that keeping everything in a savings account
yield at least a small positive return versus the possibility of losing
if you had invested it and markets fell. However, even for cash, your
of return might turn out to be negative in the end. The chief culprit
- a general uptrend in prices. Inflation has been rising in India and
average weekly inflation in 2008 was 9.11%. Taking inflation into
overall purchasing power of your money is going to be reduced.
final reason that many investors
will bring up would be that they simply wish to wait out any volatility
markets now, and that they will re-enter the market and invest again
"coast is clear". In theory, this represents the best of both worlds,
where investors can avoid losses and reap returns when the market rises
right time. The key problem is identifying "the right time". It is
notoriously difficult to get this kind of short-term market timing
More often than not, by the time the "coast is clear" to investors,
markets would have already rebounded significantly and hence, a lot of
gains would have been missed.
take a volatile year for the Indian
market as an example. The most recent one was 2006. Within a single
index just lost 30% on account of the fall in the commodity prices, the
slowdown in the global economy, a hike in the US interest rates and
regulation to treat FIIs as traders and not as investors. However, 2006
great year - the BSE Sensitive Index (SENSEX) rose 47%. So, if as an
you ignored the short-term volatility and stayed invested in the Indian
throughout the whole year through the correction, you would have gained
return of 47% for the year, which is pretty good by most investor's
the strongest rebound often comes after the worst has happened.
stayed invested throughout 2006 & 2007 have come out on top better
trying to time the exit and entry too closely.
conclusion, statistically better
returns could be achieved through staying invested with a longer
period, instead of only holding cash and trying to time the market too
Just make sure you stay well-diversified across the sectors and asset
and you should be able to weather any situations, be it high oil prices
or a US
recession. Also, the fundamentals of the Indian markets remain strong,
do not expect a US recession to derail the Indian economy, though it
volatility. Thus, we believe that facing the year 2009 with a
portfolio and staying invested for the long-term, will be the best
adopt going forward.