Staying the Course

In January of this year, I made a pretty massive investment for one of my family members in a mutual fund whose philosophy I strongly believe in. I had the option of investing in the Liquid and doing a Systematic Withdrawal Plan to invest in Equity or invest in lumpsum. My own testing has shown that its basically a coin toss on which is better and I opted for the Lump Sum.

Today, that investment is down 24% and it pains me that no end. But this investment was done not for any short term goals but a goal that is 18 years away at the minimum. While the bad start point will do doubt have an impact, I think that the investment based on my assumed return will still meet the goal.

I came across this tweet today and while I did pass a sarcastic joke, the fact remains that the best thing to do if you continue to believe in the fund and their philosophy is to just sit tight

To the investors facing huge MTM losses,

Let me tell you something that someone much wiser than I told me at a similar point in my life. Do nothing. Just let this pass.
It may seem like the hardest thing in the world but it is profoundly easier than what you are contemplating.

— Mutual Funds Guide (@_Mutual_Funds_) April 4, 2020

This is not to say that the fund will perform according to one’s expectation, but unless you are a professional, I can say with 80% confidence that over a long period of time, you will find it tough if not impossible to beat returns generated by the majority of funds while investing directly in stocks.

When we invest in stocks, we are not just managing a part of our money but need to act as our own fund managers. But we are in many ways handicapped – from our ability to research the companies we wish to invest in to our own behavioral biases which do not allow for acts like cutting the losses.

DSP Blackrock Micro Cap Fund in 2008/09 fell nearly 75% from the peak. Subsequently though, it rose from a NAV of 4.50 to a high of 73 in January 2018. This was accomplished I believe by not just sitting on the portfolio of 2008 but being active.

I don’t know when this bear market will end or how long it will take, but data shows that unless you are able to catch the absolute low, you are better off just staying the course. For instance, I checked the difference in one’s return if one invested 3 months before the final low and 3 months post take off when it became clear that the crisis had passed off. Being early was as damaging as being late. Since the 3 month prior and the low can be known only in hindsight, this is at best a theoretical exercise with no practical value.

Mutual Funds wish that you keep sipping to infinity regardless of the underlying markets. But if you were to be practicing any sort of asset allocation, you know that just the market returns alone can significantly boost your equity exposure. When times are good, it’s best to sip into debt and when times are bad, make the switch the other way.

The reason for every bear market is different and yet the final outcome is similar – the weak get punished, the strong survive and later thrive. As a theoretical exercise, it’s interesting to wonder if we could have exited before the big crash arrived, but if everyone thought the same, one needs to wonder if there would have been a market to sell. 

Personally I practise a medium to long term form of momentum investing which means my exits are not quick enough in crashes such as these. But history has taught me that if I stick to my system and the signals, I will be able to generate a return that helps me in achieving my goal. To me, that is the final objective.

The Corona Virus doubtless will change a lot which means that a lot of companies will end up on the losing side of the battle. By buying an Index or a fund whose philosophy you strongly believe in, you should be rest assured that the winners will most probably be part of your portfolio while the losers are ousted. Finally, that is what matters between the Winning Portfolio and the Losing Portfolio.

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