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
www.ladder7.co.in
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