Equities/stocks/mutual funds are meant to be the highest return avenue. But then, how come it does not actually end up being so for most of us? 

Many of us have seen good returns, but mostly on paper only (and not as money in our pockets!). During market volatility, there is always a lot of news flying around and a lot of views expressed.

Consider these, for instance.

The Sensex could touch 14,000 levels or even 12,000 levels

Well, probably the same people, when the index was at 20,000, were most likely suggesting levels of 25,000!

Similarly at negatives, there would be a lot of views that the market would go down lower. Many investors do not make money in stocks because of two key factors: fear and greed. Our view is that an investor who is able to overcome these critical factors and is able to take a rational decision will be able to generate good long term returns. 

Empirically, for centuries, equities have generated the highest return among all asset classes across markets.

History teaches us a lot

This is what Wall Street's legendary investor Warren Buffett -- regarded as one of the world's greatest stock market investor, and CEO of Berkshire Hathaway -- has to say about the Internet bubble: "The world went mad. What we learn from history is that people don't learn from history." With an estimated net worth of US$62 billion, he was ranked by Forbes as the richest person in the world as of March 5, 2008.

Let us look at what has happened in the past. Let us look at one of the worst ever falls that has happened. That too of a sectoral fund through the great dot com bust.  Industry majors like Wipro [Get Quote] and Infosys [Get Quote] saw substantial falls. You can only imagine what must have happened to the second rung stocks in the sector.

The SIP returns of a technology fund like Birla Sun Life went down from Rs 10 NAV all the way down to Rs 2.52 on October 10, 2001. This was reflected in the lows that all the technology funds saw.

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On the other hand, for someone who invested at that point, the value went up four times when it hit the face value of Rs 10 from its low price.

Learnings:

~ Even though one had started investing at the market peak, the SIP approach has given good returns
~ Someone who invested at the bottom has seen over 8-time appreciation from the low as per their NAV price on February 29
~ Avoid sectoral funds except in sectors like infrastructure where one may want to take a 5 year bet
~ Stay diversified

Trying to time the market -- a common mistake

How many of you have kept price targets for your stocks portfolio and seen it falling just before you wanted to sell? A mistake that can be easily avoided! In expectation of falls to 12,000 and 14,000 levels, you hold back switches to equity, and may end up missing an opportunity.

Learnings:

~ Phase your switches back to equity and continue to invest at every fall. While 12,000 could happen, you should not miss out an opportunity even if it does not. Hence you should switch and invest some money now and if the markets fall further, you could switch more. When markets have fallen, about 7000 points, it is definitely a great time to buy

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~ 'Buy low, sell high' is easier said than done. Don't do the opposite as investors normally do as a result of their 'fear and greed'. Think about it logically and overcome the fear: the odds are very much in favour of an uptrend, after a fall. It may take a year or two but these are the investments that will do the best 

Long term equity investing is the real wealth creator

As you would see from the SIP returns table, someone who invested on a monthly basis a sum of Rs 10,000 per month invested a value of Rs 12 lakhs; and at the end of Feb '08 has had a value of Rs 94 lakh to Rs 1.3 crores in good funds despite the market fall. (The Sensex was at 17,578 on February 29, 2008, the date of valuation of the mutual funds above). 

Learnings:

~ Sleep over the bad times, continue to invest and invest long term (about 2 years) if you want to really build wealth. If this is what a person had done in the past 10 years, s/he would have become a crorepati in this period by investing only Rs 10,000 per month
~ While returns may not be sustained in the future, the market volatility would actually help enhance returns for the long term for an investor who is logical and disciplined on his investments

The bigger picture

After every large falls, the upside is higher than the downside from. While markets could fall further, in the long term it would even out. This is what you can do now:

~ Use diversified investments; preferably mutual funds that help you manage risk very well through systematic investments
~ If you have not already diversified do so at the earliest!
~ If you have a balance of debt and equity, you should be switching a part of the debt portfolio into equity. This is the time you should be taking a higher level of risk, even if it means that you temporarily have a higher equity composition versus what you desire. Spread it out over a period, and keep money for further falls

• Don't get foxed by returns on your investments

~ Invest more aggressively and on big falls you could even make lump sum investments in addition to the systematic investments
~ Don't miss your SIPs at this time. These are likely to give you the best returns. The returns may not look good now, but they are precisely done so that you get the advantage of the market falls
~ And if you are completely invested into equities and have not yet exited, sleep through the volatility. If you have used well diversified investments, you have nothing to worry in an economy like India

And above all it is important to consciously overcome fear and greed and take a rational decision.

Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management company.

Rediff disclaimer

The views expressed above belong to the author and readers should take the help of professional financial advisors before investing their money.