Sensex is at an All Time High - Invest Or Not?

Sensex and Nifty are making new lifetime highs regularly these days. As an investor, this is great news as the value of your investments is going up.

But many are sitting on the sidelines thinking whether to enter the markets now or once it undergoes a correction (maybe 10-20% kind of fall). These people are afraid that they might suffer losses if they end up investing immediately before the markets fall.

No doubt markets are sitting at new highs and might make a few more in the coming months. But does it make sense to wait for a significant correction before investing? Or is it wiser to just continue investing?

History often repeats itself and presented below is an analysis of historical data to arrive at an objective answer to this question.

All-time highs are common. Don’t worry.

Is the market for making a new high for the first time? Not! Have a look at the history of Sensex since 1991.

Now statistically speaking, Sensex has made 350+ new highs since 1991. So it is not that uncommon at all.

But, if we were to look at the bigger picture, then there have been 6 major time-periods when the SENSEX achieved all-time highs after a considerable period (highs achieved within a short period were considered as part of the larger period). 

Of course, it’s not guaranteed but generally, all-time highs are followed by new all-time highs shortly. And investors who exit the market at new highs or stay out because they feel markets are due for a correction, generally don’t get it right (unless of course, they have an oracle by their side).

Probabilistically speaking, you shouldn’t worry too much about markets reaching new highs and being destined for big falls. As investors, you need to focus instead on the bigger picture.

Think about the choices that you have - savings account, FD, equity, real estate, gold, etc. And which among these has proven itself to deliver the highest returns when invested in the long term? (there is another subject of asset allocation which we will discuss separately on how too allocate your savings over different asset classes)

The answer is equity. And we have enough proof for that. So if you are a long-term investor, put your efforts in finding the right portfolio that will grow your wealth in years to come. And a portfolio that is made up of equity funds is best suited to do that:

And don’t worry even if there are small falls in the near term. The long-term outlook is still blindingly bright.

The only way to benefit from equity’s phenomenal growth potential is to participate in it; and not by sitting on sidelines predicting the next crash.

Don’t wait for a Crash to Start Investing

One of the greatest investors ever, Peter Lynch said,

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves.”

And this is 100% true! 

If people had exited the markets predicting a crash (after the fresh highs made in 2004), they would have missed the entire bull run of 2004-2007. There is no guarantee that the market will fall once they cross old highs.

Remember that in investing, money is made by being in the market and not by being on the sidelines.

If you have a long investment horizon, then waiting for the right time to invest doesn’t help. By trying to time the market and getting ready to make an all-or-nothing kind of investment decision, you’re bound to stress yourself out by waiting alone. It just doesn’t work for most people. And it is an approach destined to ruin your money’s wealth creation potential.

Proof that You Profit even if Investing near All-Time Highs

Here are three examples where your investments start near new lifetime highs: 

Example 1: You start investing Rs 5,000 monthly (in Sensex) after the Sensex made a new lifetime high in July 1999
You invested a total of Rs 10.7 lacs which is now worth Rs 40.2 lac (in May-2017) with a rate of return (XIRR) of ~13.4%

Example 2: You start investing Rs 5,000 monthly in Sensex after it made a new high in January 2004
You invested a total of Rs 8 lacs which is now worth Rs 18 lac (in May-2017) with a rate of return (XIRR) of ~11.4%

Example 3: You start investing Rs 5,000 monthly in an equity mutual fund immediately after the Sensex made a new high in January 2004
You invested a total of Rs 7.7 lacs which is now worth Rs 30.4 lac (in May-2017) with a rate of return (XIRR) of about 19.8%

*The mutual fund referred for this analysis is ICICI Prudential Value Discovery Fund

Even if you started investing near the all-time highs, you would still have done pretty well. The returns in the above examples, i.e. 13.4%, 11.4%, and 19.8% easily beat the post-tax returns of so-called risk-free instruments like banks FDs (5-7% after-tax returns). 

Action Plan for You

So as investors, what should you be doing?

• Waiting to start investing?
  

  If you are waiting to start investing to make small monthly contributions, then you should just start without worrying about highs or lows being achieved by the market. If you have large lump-sum, then you should stagger your investments and transfer partial amounts periodically (monthly, quarterly, etc.) into the portfolio of your choice till all the money is invested.
   

• Already investing regularly?
  

  Don’t stop your monthly contributions. Automatic monthly deposit (SIP) is perhaps the best way to invest, even at all-time highs. Just ensure that you stick to your portfolio (or your own chosen funds) and monitor that they are at least growing in line with the overall market’s rise.
   

• Need money in 6-12 months?
  

  Start booking your profits slowly and move out the required money into safer liquid or ultra short-term funds (like Wealthy’s short term conservative portfolio).

Final Thoughts

When markets are making new highs, it might be tempting to book all profits and wait for a correction (to buy again at lower prices). But this approach is about timing the markets and 99% of the people cannot do it.

Market history tells those new all-time highs are nothing to worry about. It’s a perfectly normal market phenomenon.

So keep your focus on the Indian economy’s long-term growth and don’t sit on the sidelines endlessly. Participate in this story, invest in your financial goals and make wealth for yourself. And finally, a good rule to control those emotions: 

“Best time to invest is whenever you have the cash to spare”