I’ve been asked this question a lot of times. “What should I do with my SIP during bad market conditions?” “Recession is approaching, should I pause my SIP?” “There are fears of global slowdown, should I continue Investing through SIP or buy gold?”
If you plan to stay invested for long term, stay invested. Recessions will come and go. Good companies have power to resist recessions and you can in fact buy more when the recession hits.
If you’re investing through SIP, I’d strongly recommend not to withdraw funds or stop SIP before you reach you goal.
One of the main advantage of SIP is that it has the benefit of rupee cost averaging.
It simply means you automatically buy less share/unit when the price is high and buy more when the price is low, which is a good practice. But how does it automatically work?
Let’s take an example:
Lets says the share price of XYZ company is Rs. 600 and you have set up a monthly SIP for Rs. 5000/-. So you buy 8.33 unit/share in that month.
When the price increased next month to Rs. 900, you automatically buy 5.55 unit/share. This is because we set up a fix Rs./$ amount to invest every month in an SIP and not a fix unit.
So even if the market is going down, you are going to buy more units (if its a mutual fund) or more share (if its direct equity), which is the best practice.
If you try timing the market, withdraw funds and the market goes up (I’m just saying) as it has already corrected and then you’ll end up buying when the prices are high.
In the bull market, the NAV goes up. In bear markets, the units you acquire goes up. In long run, combination of both create wealth. If either of them is missed, your fortune is missed.
What about my principal protection during recession?
Well, if you google when is the next recession, you’ll find 100 articles stating that it’s approaching soon, they’ll even give you a date (or a past date which never happened). On the other side, if you google what will be Sensex in 2025, you’ll probably see experts stating it’ll touch 1,00,000 points and same for other indices.
No one can ever identify the global recession and even if you do, you cannot be 100% sure to withdraw your fund, not even the fund managers who manages billions under asset.
Hardly a few very intelligent people (3 or 4 group of people in the whole world) noticed the financial crises of 2008 before it happened and they were all hedge fund managers who deals with all kind of trading (shorting, leveraging, F&O, etc, you might see the movie “The Big Short” for that).
Do not try to time the market, even Warren Buffet, the great investor of our generation doesn’t recommending timing the market.
I remember Warren Buffett once said “If I buy a stock today and the market remains shut for 10 years, it wouldn’t matter.” This is simply because he knows he isn’t collecting pennies. He buys when he is confident about a company and stay strong when market is down and enjoys the dividend when earnings are good.
For us, it’s better to stay invested in a disciplined manner and control our emotions. Keep doing the things right and right things will happen.
Good advice thanks Mr. Mohsin