Thursday, August 11, 2011

Is this a good time to buy stocks/funds/gold?

Many small investors must be thinking about this question. Anecdotal evidence from the emails and comments I receive suggest as much. The answer is quite simple: It is a good time to buy if you have the money.

Experts will tell you that timing the market is not a sensible approach to investing. It is how much time you spend in the market that counts. That is because most small investors are happy to book small profits, and miss out on the big profits that can be made by holding on for the long-term.

So, why is Jim Rogers, an acknowledged guru of the commodity markets, advising caution about buying gold; and ace stock market investor, Rakesh Jhunjhunwala, suggesting that it isn’t time for bottom fishing yet? Why this apparent contradiction?

The dichotomy arises due to the different viewpoints of two different groups of investors. For the multitude of inexperienced retail investors, timing the market is not recommended. They just do not have the knowledge to put together all the little pieces of a vast economic jigsaw puzzle. Professional investors like JR and RJ know what they are doing, and can go in and out of markets with surgical precision.

When our Finance Minister said that the recent fall in stock prices was a result of western disturbances and had nothing to do with India, he was deliberately speaking a half-truth to try and prevent a bigger crash. Why? Because uncontrolled inflation and consequent hikes in interest rates had already slowed down the profit growth of India Inc., and pushed the stock market into a down trend.

Resolution of the economic crisis that gripped USA and Europe through tough policy measures by central banks was postponed by rounds of quantitative easing and bailouts. Now the sovereign debt problems are coming home to roost.

Global stock markets, India included, had a heady rise from the bear market lows of Mar ‘09. It is time for a reality check, and the picture isn’t pretty. No wonder gold prices are shooting through the roof, as fearful investors are dumping stocks and funds to buy the yellow metal.

The good news is that the Indian economy is in far better shape than those of the developed countries. Growth has slowed, but remains strong. However, inflation is still rising. Another couple of rounds of interest rate hikes are almost a given. That means more pain for investors in stocks and mutual funds in the near term.

But, as I mentioned in the beginning, if you have the money and a long-term view, this is a good time to buy. Don’t bet the barn. Invest 20% of your available surplus every month for the next 5 months. Things should start improving by then. Avoid individual stocks if you haven’t mastered stock-picking skills. Split your investments between a good balanced fund (like HDFC Prudence or DSPBR Balanced) and a good large-cap fund (like HDFC Equity or DSPBR Top 100).

I’m not a great fan of buying gold, because it gives no regular returns. The flight to gold is assuming panic proportions, and panic buying leads to severe corrections. If you must buy gold, buy a gold ETF during the next price dip.

Related Posts

"Time in" vs. "Timing" the market
Should you invest in Balanced Funds?
Gold and Silver Chart Patterns: divergent directions


Jasi said...

Dear Sir,

I would like to re-iterate what I have learnt from you.
Portfolio Asset Allocation (PAA).
To buy or not to buy should become apparent by one's current PAA. It is important to have a plan and stick to it. Trust me it will help you become completely indifferent to market dynamics.
Personally im an investor and a long term one at that. Such corrections will come n go and honestly, since i have a PAA plan, i dont care :)

And I thank you for instilling it into me Sir!

Thanks and regards

btw -> I like to keep 5% of my investment regularly in gold. Its a good hedge for future needs if not returns :)

VIPAN said...

Well those who dont like the votality of equity market can park their money in good co NCD which gives 10-11% return and capital appreciation also when interest rate moves down. One such option is NCD of L& T fin for 10 yrs which carry coupen rate of 10.24% and interset is payable half yearly which makes yield of 10.50% same is listed on NSE/BSE and currently available for Rs. 1040 which means basiccally at their face vales of Rs.1000/- after considering the interest component for 5 months. Why i like this particular ncd is that one this is for 10 yrs second without put or call option which means it will remain in force !

Subhankar said...

@Jasi: Thanks for your comments.

All investors should have an asset allocation plan. It will remove much of the guesswork about when to buy and when to sell.

@VIPAN: Appreciate your inputs regarding the L&T Fin NCD. TISCO (or is it TELCO?) has issued a perpetual bond that can also be looked at.

The downside to corporate bonds and NCDs is that at the time of maturity, they may not be in a financial position to return your capital. Good companies can delay repayment. Questionable companies can throw their hands up.

Unknown said...

Not sure if I am reading the situation right as I've been totally out of touch with markets for a very long time.

High interest rates, prospect of another rate hike, bad state of global economy - seems like the right time for me to come out of the hibernation and take a fresh look at the markets. Looking at the current state of markets, I think I'll skip the high rate NCDs. If I do the homework right and be patient while deploying funds, I might get more returns from the market in comparison to NCD. Of course, that is based on the belief that nothing lasts forever, while not ignoring the possibility that it can get a lot worse before it gets better.

Subhankar said...

You haven't missed much, Eswar - except perhaps, the opportunity to book some profits and salt it away in a bank FD (or NCD). The periodic returns from the FD can then be redeployed in the market without putting the principal at risk.

Of course, any such strategy has to be guided by your asset allocation plan.