People have different motives for investment. Some want to secure their future while the others want to multiply their money. Keeping the money in a savings bank account fails to beat the inflation also. So, one needs to resort to different forms of investment. One should also understand that risk is an inherent part of investment. Generally, greater returns are associated with greater risk, e.g. stock markets, which are associated with higher risk over shorter periods, have provided the highest long-term returns as compared to short-term cash investments that have provided the lowest long-term returns. Thus, it is crucial to be aware of different forms of investment and the risk associated with each class. One cannot eliminate the risk to achieve greater returns, but with careful research and systematic investment, one can minimize the risk. The broader asset classes of investment are:
Bank Deposits: These can be long term or short term. Here, the
returns are low as compared to other investments but risk is minimal as the
returns are guaranteed by the bank.
Bonds: These are issued by a government or a company. They pay a
certain interest rate periodically and re-pay the money that one pays to them
on maturity. These lock the money for a certain period of time and the risk
here is the credibility associated with the corporate or the government that
issues the bond.
Gold: This asset class is generally looked upon as an inflation
hedge and investment demand for gold generally increases in times of crisis.
Although this asset class seems very lucrative given the recent returns;
however, given the current prices, the risk-return ratio is unfavorable.
Stocks: By investing in the shares of a listed company,one gets the
ownership of the company in proportion to the amount of the investment. Here,
the returns can come in two ways: the dividends received out of the profits of
the company and the capital gains made if one sells the shares at a higher
price than his buy price. This asset class is associated with high risk in the
short term but they have historically provided higher returns than any other
asset class in the long term.
Stocks as an asset class is
highly alluring, however, many have burned their hands as they ignore the basic
principles of investing. Most people either invest in the wrong stock or at the
wrong time. Moreover, they end up "Buying High and Selling Low" when
it should actually be the reverse. Identifying the "Low" and the
"High" of the market is not possible always, however, one can
definitely make money if one has a strategic approach towards investment.
Benjamin Graham, the father of
value investing principle talks about formula investing i.e. Dollar cost
Averaging principle in his famous book “The Intelligent Investor” which is
considered as a bible for Value
Investors. He says that “dollar-cost averaging” enables one to put a fixed
amount of money into an investment at regular intervals. Every week, month, or
calendar quarter, one has to buy more—whether the markets have gone (or are
about to go) up, down, or sideways. It’s all out of sight, out of mind. That
way, one does not have to guess where the market is going.
The advantages of this type of
investment are as follows:
1. One does not need to
predict the movement of the market
2. One does not need to
identify stocks which removes the risk of investing in wrong stock
3. One does not need to time
the investment which removes the risk of entering at the wrong time
4. One gets the benefit of
diversification, by investing in an index which represents the broader market
Thus one needs to follow a simple
strategy of "regular investment" in a well-diversified portfolio.
Investment in a range of different companies from blue chip to tech stocks
removes the stock specific risk and leaves only the market risk. However, it is
not possible to invest in a whole lot of companies for a retail investor. Thus,
to avail of the opportunity of investing in top blue chip firms, one can invest
in S&P CNX Nifty which is a well diversified index of 50 stocks accounting for 21 sectors of the economy. We have devised
a strategy on Nifty to capture the cycles in the market over the medium term
based on this concept of systematic investment discussed above. Our strategy is
based on the simple premise to gain from the market volatility as we buy on
dips and sell on highs .
Let us set the rules for our strategy:
Rule 1: Wait for the market to make a high
Rule 1: Do not start investing until the market falls 13% from its
high
Rule 2: Start investing Rs. 5000 every month as soon as Nifty
falls 13% from this high
Rule 3: Double your investment every month to Rs. 10000 once the
market falls 21% from the high
Rule 4: If the market recovers its losses and rises above 21% from
the high, again reduce your investment to Rs. 5000
Rule 5: If market gains further and rises above 13% mark, stop
investing.
Rule 6: Once the previous high is achieved again, sell off all
your investments.
Let’s
see how our strategy works during the period of 2008 and 2010. Market made its
high on 8th of January 2008 at 6287.85. We decided to start our
systematic investment in Nifty Bees with an investment of Rs. 5000 as soon as
the market falls 13% from the high. Thus we start our journey with an
investment of Rs. 5000 on 21st January,2008 at Nifty of 5208.8. Once
we start investing, we decide to invest Rs. 5000 at the beginning of every
month, if on that date Nifty is below 13% from the high of 6287 observed on 8th
of January,2008 and Rs. 10000 if the market falls down 21% or more. We decide
to wind up our position, once Nifty reaches its previous high of 6287. Thus the
strategy can be summarized as under:
Nifty Range Investment
>5470 Rs.
0
5470 to 4967 Rs.
5000
< 4967 Rs.
10000
The table below details our investment and the
status of the portfolio at the beginning of each month:
|
DATE
|
NIFTY CLOSE
|
INVEST-MENT
|
SHARES BOUGHT
|
TOTAL SHARES
(Units)
|
CUM.
INVESTMENT
|
AVG PRICE
|
MKT. VALUE
|
P/L
|
|
|
|
|
|
|
|
|
|
|
|
21-Jan-08
|
5,209
|
5,000
|
0.96
|
0.96
|
5,000
|
5209
|
5,000
|
-
|
|
1-Feb-08
|
5,317
|
5,000
|
0.94
|
1.90
|
10,000
|
5262
|
10,104
|
104
|
|
3-Mar-08
|
4,953
|
10,000
|
2.02
|
3.92
|
20,000
|
5103
|
19,412
|
(588)
|
|
1-Apr-08
|
4,740
|
10,000
|
2.11
|
6.03
|
30,000
|
4976
|
28,575
|
(1,425)
|
|
2-May-08
|
5,228
|
5,000
|
0.96
|
6.99
|
35,000
|
5010
|
36,522
|
1,522
|
|
2-Jun-08
|
4,740
|
10,000
|
2.11
|
9.10
|
45,000
|
4948
|
43,108
|
(1,892)
|
|
1-Jul-08
|
3,897
|
10,000
|
2.57
|
11.66
|
55,000
|
4716
|
45,442
|
(9,558)
|
|
1-Aug-08
|
4,414
|
10,000
|
2.27
|
13.93
|
65,000
|
4667
|
61,469
|
(3,531)
|
|
1-Sep-08
|
4,349
|
10,000
|
2.30
|
16.23
|
75,000
|
4622
|
70,565
|
(4,435)
|
|
1-Oct-08
|
3,951
|
10,000
|
2.53
|
18.76
|
85,000
|
4531
|
74,109
|
(10,891)
|
|
3-Nov-08
|
3,044
|
10,000
|
3.29
|
22.04
|
95,000
|
4310
|
67,097
|
(27,903)
|
|
1-Dec-08
|
2,683
|
10,000
|
3.73
|
25.77
|
105,000
|
4074
|
69,140
|
(35,860)
|
|
1-Jan-09
|
3,033
|
10,000
|
3.30
|
29.07
|
115,000
|
3956
|
88,174
|
(26,826)
|
|
2-Feb-09
|
2,767
|
10,000
|
3.61
|
32.68
|
125,000
|
3825
|
90,419
|
(34,581)
|
|
2-Mar-09
|
2,675
|
10,000
|
3.74
|
36.42
|
135,000
|
3707
|
97,411
|
(37,589)
|
|
1-Apr-09
|
3,060
|
10,000
|
3.27
|
39.69
|
145,000
|
3653
|
121,460
|
(23,540)
|
|
4-May-09
|
3,654
|
10,000
|
2.74
|
42.42
|
155,000
|
3654
|
155,021
|
21
|
|
1-Jun-09
|
4,530
|
10,000
|
2.21
|
44.63
|
165,000
|
3697
|
202,181
|
37,181
|
|
1-Jul-09
|
4,341
|
10,000
|
2.30
|
46.94
|
175,000
|
3728
|
203,745
|
28,745
|
|
3-Aug-09
|
4,711
|
10,000
|
2.12
|
49.06
|
185,000
|
3771
|
231,135
|
46,135
|
|
1-Sep-09
|
4,625
|
10,000
|
2.16
|
51.22
|
195,000
|
3807
|
236,914
|
41,914
|
|
1-Oct-09
|
5,083
|
5,000
|
0.98
|
52.20
|
200,000
|
3831
|
265,375
|
65,375
|
|
3-Nov-09
|
4,564
|
10,000
|
2.19
|
54.40
|
210,000
|
3861
|
248,255
|
38,255
|
|
1-Dec-09
|
5,122
|
5,000
|
0.98
|
55.37
|
215,000
|
3883
|
283,613
|
68,613
|
|
4-Jan-10
|
5,232
|
5,000
|
0.96
|
56.33
|
220,000
|
3906
|
294,715
|
74,715
|
|
1-Feb-10
|
4,900
|
10,000
|
2.04
|
58.37
|
230,000
|
3941
|
285,986
|
55,986
|
|
2-Mar-10
|
5,017
|
5,000
|
1.00
|
59.36
|
235,000
|
3959
|
297,833
|
62,833
|
|
1-Apr-10
|
5,291
|
5,000
|
0.95
|
60.31
|
240,000
|
3979
|
319,069
|
79,069
|
|
3-May-10
|
5,223
|
5,000
|
0.96
|
61.27
|
245,000
|
3999
|
319,983
|
74,983
|
|
1-Jun-10
|
4,970
|
5,000
|
1.01
|
62.27
|
250,000
|
4015
|
309,510
|
59,510
|
|
1-Jul-10
|
5,251
|
5,000
|
0.95
|
63.23
|
255,000
|
4033
|
332,021
|
77,021
|
|
2-Aug-10
|
5,432
|
5,000
|
0.92
|
64.15
|
260,000
|
4053
|
348,418
|
88,418
|
|
1-Sep-10
|
5,472
|
-
|
0.00
|
64.15
|
260,000
|
4053
|
350,996
|
90,996
|
|
1-Oct-10
|
6,143
|
-
|
0.00
|
64.15
|
260,000
|
4053
|
394,074
|
134,074
|
|
1-Nov-10
|
6,118
|
-
|
0.00
|
64.15
|
260,000
|
4053
|
392,415
|
132,415
|
|
5-Nov-10
|
6,312
|
-
|
-
|
64.15
|
260,000
|
4053
|
404,918
|
144,918
|
Thus
after making a disciplined investment every month, we observed that Nifty
crossed the mark of its high observed earlier on 5th November,2010
on which date it made a new high of 6312. As decided, we wind up all our
positions. As on the liquidation date, on November 5, 2010 we had invested a
total of Rs. 2,60,000 and the market value of our portfolio stood at Rs.
404917. Thus we made a gain of Rs. 1,44,917(a gain of 56%) in a period of just
2 years. Instead if we had invested in Nifty at one go, we would have stood at
negligible gains.
A
look at the table will raise a question in your mind that the strategy is not a
perfect strategy as one also makes a loss to the tune of 34% during the course
of investment as on 1st December,2008. However our strategy has the first
premise to capture the entire cycle of the market from high to bottoms and back
to the highs and to avoid market timing. Had we timed the market, we could have
avoided the loss or might have made a bigger loss. However, we wanted our
strategy to be unbiased and simple as we had confidence that it will yield
results once the cycle is complete. Thus one has to be patient till the cycle
completes itself to see the result of a substantial gain.
However
what we discussed above was pertaining to 2008-2010 period. Again, market
started falling in 2011 and as discussed above, we were ready to implement the
same strategy. We had to take the market closing high of 6312 touched on 5th
November, 2010 as a highest point and start investing as per the strategy. We
were to start with an investment of Rs. 5000 once the market fell below 5491
(down 13% from the high of 6312) and double our investment to Rs. 10000 once it
slipped further below 4987 (down 21% from the high of 6312). Based on this, we
started a fresh journey of our investment on February 01, 2011 with Rs. 5000 at
the market close of 5417 thus procuring 0.92 units. Our journey of investment
and position creation is detailed in the table below:
|
DATE
|
NIFTY CLOSE
|
INVEST-MENT
|
SHARES BOUGHT
|
TOTAL SHARES
(Units)
|
CUM. INVESTMENT
|
AVG PRICE
|
MKT. VALUE
|
P/L
|
|
1-Feb-11
|
5,417
|
5,000
|
0.92
|
0.92
|
5,000
|
5,417
|
5,000
|
-
|
|
1-Mar-11
|
5,522
|
-
|
0
|
0.92
|
5,000
|
5,417
|
5,097
|
97
|
|
1-Apr-11
|
5,826
|
-
|
0
|
0.92
|
5,000
|
5,417
|
5,378
|
378
|
|
2-May-11
|
5,701
|
-
|
0
|
0.92
|
5,000
|
5,417
|
5,262
|
262
|
|
1-Jun-11
|
5,592
|
-
|
0
|
0.92
|
5,000
|
5,417
|
5,162
|
162
|
|
1-Jul-11
|
5,627
|
-
|
0
|
0.92
|
5,000
|
5,417
|
5,194
|
194
|
|
1-Aug-11
|
5,517
|
-
|
0
|
0.92
|
5,000
|
5,417
|
5,092
|
92
|
|
2-Sep-11
|
5,040
|
5,000
|
0.99
|
1.92
|
10,000
|
5,222
|
9,652
|
-348
|
|
3-Oct-11
|
4,850
|
10,000
|
2.06
|
3.98
|
20,000
|
5,029
|
19,288
|
-712
|
|
1-Nov-11
|
5,258
|
5,000
|
0.95
|
4.93
|
25,000
|
5,073
|
25,911
|
911
|
|
1-Dec-11
|
4,937
|
10,000
|
2.03
|
6.95
|
35,000
|
5036
|
34312
|
-688
|
|
2-Jan-12
|
4,640
|
10,000
|
2.16
|
9.11
|
45,000
|
4942
|
42249
|
-2751
|
|
1-Feb-12
|
5,198
|
5,000
|
0.96
|
10.07
|
50,000
|
4967
|
52330
|
2330
|
|
1-Mar-12
|
5,366
|
5,000
|
0.93
|
11.00
|
55,000
|
5001
|
59019
|
4019
|
|
2-Apr-12
|
5,296
|
5,000
|
0.94
|
11.94
|
60,000
|
5024
|
63253
|
3253
|
|
2-May-12
|
5,254
|
5,000
|
0.95
|
12.89
|
65,000
|
5041
|
67751
|
2751
|
|
1-Jun-12
|
4,911
|
10,000
|
2.04
|
14.93
|
75,000
|
5023
|
73322
|
-1678
|
|
2-Jul-12
|
5,284
|
5,000
|
0.95
|
15.88
|
80,000
|
5039
|
83892
|
3892
|
|
1-Aug-12
|
5,221
|
5,000
|
0.96
|
16.83
|
85,000
|
5049
|
87889
|
2889
|
|
3-Sep-12
|
5,277
|
5,000
|
0.95
|
17.78
|
90,000
|
5061
|
93828
|
3828
|
|
1-Oct-12
|
5,705
|
|
0
|
17.78
|
90,000
|
5061
|
101444
|
11444
|
|
1-Nov-12
|
5,610
|
|
0
|
17.78
|
90,000
|
5061
|
99756
|
9756
|
|
3-Dec-12
|
5,878
|
|
0
|
17.78
|
90,000
|
5061
|
104529
|
14529
|
|
1-Jan-13
|
5,938
|
|
0
|
17.78
|
90,000
|
5061
|
105585
|
15585
|
|
1-Feb-13
|
6,041
|
|
0
|
17.78
|
90,000
|
5061
|
107422
|
17422
|
|
1-Mar-13
|
5,702
|
|
0
|
17.78
|
90,000
|
5061
|
101403
|
11403
|
|
1-Apr-13
|
5,697
|
|
0
|
17.78
|
90,000
|
5061
|
101312
|
11312
|
|
2-May-13
|
5,911
|
|
0
|
17.78
|
90,000
|
5061
|
105118
|
15118
|
|
17-May-13
|
6,187
|
|
0
|
17.78
|
90,000
|
5061
|
110024
|
20024
|
We
invested Rs. 5,000 every month when the market fell below 5491 and Rs. 10,000 when
it slipped further below the 4987 mark. Thus our strategy ensured that if the
market fell further, we would invest even more to sell when the market recovers
to old highs. Thus, if the market rises, we were set to gain on our investment.
This way our investment went up to Rs 90000 and we had an accumulation of 17.78
units costing Rs 5061 per unit. All these units were sold on 17th
May, 2013 when Nifty closed 6187 mark since this was almost close to the
previous high. This yielded a return of Rs 20024/- on a staggered investment of
Rs 90000/- . This turned a yield of 9.53% per annum in the second round.
However, please note that our investment of Rs 90000/- was not at one go and
was staggered. Hence actual return is much more than 9.53%. If we club the
returns for both the cycles we have been able to earn a substantial return in
times when major portfolios have yielded very small or negative returns.
Now
considering the last highest close of 6187, touched on 17th May,
2013, we decided to start our systematic investment in Nifty with an investment
of Rs. 5000 as soon as the market falls 13% or more from this high. This stands
at 5383 mark. We will double our investment once it starts trading below 21%
from this high or more. This figure stands at 4888. . We decide to wind up our position, once
Nifty reaches near its previous high of 6187. Thus the strategy can be
summarized as under:
Nifty Range Investment
>5383 Rs.
0
5382 to 4889 Rs.
5000
< 4888 Rs.
10000
Currently, in
last two months we have not closed below 5383 mark as enumerated below. Hence
we are yet to make any fresh investments. This is depicted in the table below.
|
DATE
|
NIFTY CLOSE
|
INVEST-MENT
|
SHARES BOUGHT
|
TOTAL SHARES
(Units)
|
CUM. INVESTMENT
|
AVG PRICE
|
MKT. VALUE
|
P/L
|
|
3-Jun-13
|
5,997
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
1-Jul-13
|
5,834
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
1-Aug-13
|
5,777
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
As
we saw earlier, the market makes a high, then bottoms out, and then rises again
to the highs reached earlier, or even breaches those highs in a bullish market.
Given these market cycles, it becomes very difficult to time the market and
most of the people end up losing money. Systematic investment becomes a
prerequisite to survive these fluctuations. It brings discipline to a person’s
portfolio and eliminates the element of emotions. A person does not get worried
whether the market gains or loses as he will always stand to gain from the concept
of averaging his portfolio as diversified as Nifty.
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