"Flee the bear but miss the bull?"

Well known indexing-focused US mutual fund Vanguard, points out using an interactive illustration, how of the nine US bear markets between 1950 and 2003, in all but one case, the market snapped back dramatically within one year of "hitting bottom."

At Vanguard, we're confident that the market will recover, and we're equally resolute in our belief that investing in stocks can be the best option for building wealth over the long run. And being out of the market when a recovery occurs can be costly, as history shows.

..."Historical data can't be used to predict the future, but they do tell us that the stock market has been remarkably resilient over long stretches of time," (Vanguard's chief investment officer Gus Sauter) said. "Investors who were patient during periods of stress and dislocation were ultimately rewarded for their willingness to bear market risk."

..."In the past, bear markets have been buying opportunities," Mr. Sauter said. "Although we certainly don't know when market or economic conditions will improve, and we'd be foolish to try to pinpoint the 'trough' of the current bear market, the historical implications for investors are pretty clear."

The bottom line: If you react to a sharp decline in your portfolio by fleeing the stock market and abandoning your long-term investing strategy, you'll surrender any chance of benefiting from the market's recovery when it occurs.

"The Five Investment Essentials"

Harish Rao has a column in The Mint on investments that are "a must for anyone in today's investment climate".

1. Term insurance : Aggressive life insurance is possible only through Term products. For example a 30 year old can get a Rs. 1 crore cover over the next 25 years at just Rs. 3000 per month. Definitely a must-do.

2. Health insurance : An unquestionable necessity. Again, for less than Rs. 1000 a month, a whole family can be adequately insured with a floater plan. And there are tax benefits to this.

3. PPF : the # 1 Fixed Income investment vehicle. Truly EEE (Exempt from Income Tax at every stage, plus, eligible for tax benefit under Sec 80C). No bank can match the post-tax returns of PPF.

4. Retire Debt : Want the best returns? Then retire all debt, be it credit card or personal loan. This also sets your cash free in the future. Cut spending now if you have to, but just pay off your creditors.

5. Start a SIP : Systematic Investment Plans (SIPs) are the best way to create wealth for the long term. Start one in 2-3 good diversified equity schemes. Start with a 3 year time frame and review the performance once a year. If the funds are still in the top quartile, then persist for the next 3 years. With the markets at a depressing low, there has never been a better time to get into equities.

Equities anyone? Part 2

Harish Rao has a scenario analysis, backed with data, on returns from equity mutual funds based on different entry points.

What are the lessons?:
1. Investing when the market is at the peak is profitable only when time is given for the market to recover and deliver.
2. Investing in a good mutual fund multiplies the returns. Look for MF schemes with a LONG TERM track-record (atleast 5 years +)
3. Investing when the market is down is the best recipe for long term success. (And the market is down over 55% from its peak).

What you need to do?
a. Define long term horizon. Ideal : 10 years. Acceptable : 5 years +
b. Assess your asset allocation. If you're underweight on equities, start buying it now.
c. Identify 3 superior equity mutual fund schemes : Start a Systematic Investment Plan (SIP). It is the ONLY way to benefit from volatility.
d. Get a grip on your emotions. If you are there for the long term, better see it through everything, irrespective of whether the following happens : failed monsoons, hung parliament, oil @ $ 150 or inflation @ 15%, terrorist strikes.
e. Get yourself an investment advisor, who is concerned more with your returns than his/her commissions.