You don't earn the title of Dr Doom by personifying optimism. Dr Nouriel Roubini* is rightly dubbed with the moniker of Dr Doom. He's on a roll once again and his most recent fear-inspiring predictions for the US and the global economy have gone viral.
The crux of his prediction for a tumultuous 2013, which he has referred to as the perfect storm, is a combination of factors that could play havoc with the global economy. He cites the worsening of the debt crisis in Europe; the US entering into a recession; a hard landing for China's economy; slow down of growth in the emerging economies of China, Russia, India, Brazil, Mexico and Turkey; and finally a military confrontation with Iran which would result in global oil prices going through the roof.
So if all these permutations and combinations do come into play resulting in a freefall of markets and collapse of economies, the effect would culminate into a financial Armageddon since we are running out of "policy bullets" and "policy rabbits to pull out of the policy hats" when compared to 2008.
An economic prognosticator like Roubini has credibility because of his prediction of the 2008 global financial and economic crisis. Though his current prophecy does have the virtue of reasoned logic, it's not written in stone. If Roubini was asked early 2009, when the Dow Jones was at 8,000, if there were a possibility of it touching 13,000 within three years, he would have probably scoffed. Yet, that is what happened.
So what does it mean for you as an investor? Roubini stirring things up does not mean you need to run amok. Keep your cool. Emotions (be it greed or fear) are an investor's worst enemy. Fear can dissuade you from doing what in normal times would be a simple process.
We once again reiterate the fact that you need to ignore the noise and invest in stable equity funds that buy good stocks with strong fundamentals. Do not abandon your systematic investment plan (SIP). For instance, if you started an SIP in Franklin India Bluechip for Rs 1,000/month on January 1, 1994 and continued for 18 years (ending December 31, 2011), you would have earned an annualized return of 23%. During this time, the stock market would have gone through various upheavals- the 1997 Asian financial crisis, the dot com bust, the 2001 India-Pakistan standoff that brought both sides close to war, the 9/11 terrorist attacks on the Twin Towers in New York, the global financial crisis, and the ongoing European debt debacle.
Fidelity Mutual Fund has an interesting tool on their Indian website which demonstrates the need to stay invested during the "bad days". It is because of such bad days that you reap benefits with the good days. For instance, the worst day was May 17, 2004 when the Sensex dropped 11.14%. Those who exited on that day would have missed out on a gain of 8.25% the very next day. Check out what the tool reveals.
|Notional investment = Rs 10,000
Period = June 29, 2001 to June 29, 2012
Investment tracked = BSE Sensex
Had you stayed fully invested you would have accumulated Rs 50,423/-
|The number of best days missed....||What you would have got if you missed the best days||The cost of missing those days|
|10||Rs 23,668||Rs 26,755|
|20||Rs 13,933||Rs 36,490|
|30||Rs 8,842||Rs 41,581|
|40||Rs 6,000||Rs 44,423|
Moral of the story? The bad days are actually good for you if you stick to your guns and don't deviate from your investment plan. After all, a successful investor is not one who accurately predicts the direction of the markets. To do so you would have to either be an astrologer with a very high success rate or God; chances are that you are neither. So stick to basics, which means ignore your emotions and behave rationally. At least when it comes to your money.
* Nouriel Roubini is a professor at the Stern School of Business at New York University and owner of his own consultancy firm, Roubini Global Economics.
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