25 February, 2016

When the ice calves from the mountain face…

The new year has been beset by a free-fall in equity markets & dangerous forebodings worldwide.  It is as if an icewall has calved from the mountain face and has started an avalanche ( exactly like it happened in Siachen recently ). Markets are off from their peaks by almost 25%! Obviously, investors are unnerved, worried.

Should you be worried? 

Well, you can be. But you need not be.  We focus too much on investment returns on a day-to-day, week-to-week basis. It is not helped by the fact that equity market indices can be tracked realtime & you get to see the quotations everyday in papers.  That gives you rights to brag at your sagacity or drown your gloom in another cup of coffee, depending of the flow & ebb of the stock market!  But where is the need to do either of that?

If the investments have been done after fully understanding the future needs/ goals & you don’t need that money now, why worry? That is exactly what we do for you.  For all goals less than three years, we generally suggest debt oriented funds so that your goal can be achieved without any trouble.  Equity investments are done in cases where the goals are really into the future. Market downturns get converted to real loss only when we panic & sell.  Now, that is not what we advocate. Hence, there is no real reason to panic.

What should you do?

There is too much spotlight on the stock market on a day to day basis.  Unfortunately, the index & share prices change everyday. Stock markets are an indicator of the health of the economy. But it is hardly a perfect indicator, as it factors any and all information which can potentially send the stock market soaring for no apparent reason or make it plummet without cause.

Stock markets are not true barometers of the economy. Economy cannot change from good to pathetic in 45 days; stock markets can. The good company that has fallen by say 20% would still be a cash generating business, it was a month and a half back – but may have been savaged based on expectations of poorer prospects for the sector.  If that happens, NAVs fall & MF investments will also trend down lower.

What you should do now is to insulate yourself from the pundits who are crying about bloodbath on the streets & predict where the index will be at the end of this month & where the markets will be in July or by the end of the year. You cannot build wealth watching TV or reading about stocks in newspapers. What these market mavens predict are at best informed guesses; at it’s worst, it would be chicanery – for nobody really knows the future. As for me, had I known, I would have retired long back J

The best course would be to stick with the overall financial plan and investments suggested to achieve goals.

Is it a good idea to invest in such times…

When markets are down, it is like a fire sale. Things are available cheap. So buying in such times would always offer a higher possibility of returns in future. This is not a general statement. There was a study done recently on this and they have found that the probability of higher returns in future to be high, when you invest when markets have fallen. Please read this - 

This seems intuitive; but we seldom act on it.

You need to understand one thing – that the markets can fall further from here too.  But when it starts rising, it will pass all these low markers & move up like a rising pheasant.  What matters then is that you have invested at a comparatively low level. Returns will follow.

Investor behavior conspires against them making money

Many don’t invest at all – even when the markets have fallen by 25% - like now. They expect the markets to fall further. There are enough market experts who would predict another 5% drop, 10% drop etc. Some people panic and sell when the markets drop like this. If it drops by 10%, there will be further prediction of another 10%, 15%...

When investors hear this chatter, they panic and become that deer caught in the headlights. When the bottom is reached and the markets turn, they don’t notice it. Experts may term it a dead cat bounce.  Investors now mark this lowest point & would like to wait till the market again drops to that level.  This is called anchoring. When the markets have risen 10%, they still want to wait for it to correct  to “that lowest point”. When it rises another 10% media is reporting a revival. Investors still don’t pay attention. When it rises further, they sense they have missed out on the rally & get in when the rally is well underway. This investor behavior has led to most investors seldom making money.

Data available publicly shows that maximum money comes into stock markets when markets are rallying ( and PE multiples are high ) & dry up to a trickle when the markets are really down.  There was a study done by a MF house…78% of investors invested when PE multiples were over 19  & just 1% were willing to invest when PE multiple was less than 16!

Investors hence invest when markets are high and sell or stop investing when markets are low. Is it any surprise that the average investor does not make money?Please read this - 

Work to a plan

Your best bet in these situations is to work to a plan – like we  craft for our clients. When you know where you are going & you know you will get there if you stick to the path, why worry? Planning ensures that there is a context to investment.  It also ensures that you do not overdo one part & endanger another goal. Having a plan & sticking to it is like walking on a bamboo bridge over swirling waters. The bridge may shake, but you can hold on to the sides & won’t be swept away. You would get to the other side eventually. Just ensure that the bamboo bridge is ship shape. That bamboo bridge is your Financial plan!

Author :    Suresh Sadagopan    |    Founder    |    Ladder7 Financial Advisories

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