This is certainly a testing time for Indian investors. The Indian equity market has delivered negative return over the last two years. This may come as a surprise to many new investors whose first experience with equity investing began only after COVID. They were accustomed to earning at least 6% from one-year fixed deposits, but took the plunge into equity markets, influenced by what they learned from friends, social media, and the broader investment narrative.
Since then, many have been diligently investing through systematic investment plans (SIPs), hoping to earn higher returns from equities. However, those expected returns have not materialised so far.
And there is certainly no shortage of reasons to worry. The Russia-Ukraine war continues even after four years. The Iran-US conflict is prolonged. Oil prices are rising, and inflation remains a concern. US government debt has crossed $40 trillion and the US interest rates have remained elevated, with the 10-year Treasury yield touching levels not seen in decades.
There appears to be little respite in the near term, leaving many new investors at a crossroads:
Should they continue their SIPs in equities, or should they redirect their monthly surplus towards fixed-income investments?
There Are Some Silver Linings
Despite the uncertainties and elevated inflation, the Indian economy has remained relatively resilient. GDP growth continues to be strong, at over 7%, and the medium-term growth outlook remains encouraging. The prolonged Iran-US conflict is also hurting both sides, and there could eventually be pressure on the parties to find a face-saving way to bring the conflict to an end.
More importantly, there are some fundamental lessons about equity investing that investors need to remind themselves of during difficult periods.
Equity Is a Volatile Asset Class
Equity is inherently volatile. The value of our investment can fall below the purchase price and may remain depressed or move sideways for an extended period. This is precisely why equity is considered a long-duration investment asset.
The longer we remain invested, the greater the probability of earning positive returns. Historically, equity has also been one of the few asset classes capable of comfortably beating inflation over the long term on a post-tax basis.
For long-term wealth creation, therefore, most investors cannot completely ignore equity.
So, Should You Worry?
If you invested in equity, presumably that money was not meant for a near-term financial goal. If that is the case, why worry about what the market is doing today?
A depressed market can actually create an opportunity to buy quality assets at lower valuations.
Focus on Goal Based Financial Planning
The key is to ensure that your investment strategy is aligned with your financial goals.
Short-term goals: Invest in relatively conservative and stable asset classes where protecting capital is more important than chasing returns.
Long-term goals: Equity can play an important role, and short-term market performance should not dictate your investment decisions.
The Real Challenge Is Behaviour Management
Once we understand this, investing becomes less about predicting the market and more about managing our own behaviour. Market corrections test our patience. Falling portfolio values test our conviction. Negative returns test our ability to stay disciplined.
But if our investments are properly aligned with our goals, we do not need to react to every market movement.
Stay invested. Stay focused on the goal. Let time do its job.