“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
This May we have seen BSE SENSEX moving from the levels of 39,031 on 30th April to 37,090 on 13th May and then back again to 39,352 on 20th May. Such volatility in such a short period makes us doubt our investment decisions and questions our long-term plan of staying invested in the equities. This Market volatility has the power to change our investment strategies and at times even question it. Sometimes we think that we have missed a golden investment opportunity and on other times we assume that we have invested at a very bad time. At the very best it keeps us confused on our next steps.
John Maynard Keynes has rightly said that "Markets can remain irrational for longer than you can remain solvent." But how should we treat our investments when we come across such turbulent times and what is the right course of action. Let’s discuss this.
1. Stay calm and have faith in equities
Equity is an only asset class which has given fair returns over a significant period of time. Despite being volatile, equities provide high returns and capital appreciation when compared to other asset classes. If you are not much of a risk taker, you can invest in Index Funds. An Index Fund is a kind of Mutual Fund where the investment portfolio matches the composition of Financial Market Index for e.g. SENSEX or NIFTY. This reduces the risk considerably as Fund Manager will have to stick to the same composition as the Market Index. And we all know that SENSEX has gone from 100 in April 1979 (its inception) to 39,000 levels in 2019.
2. Don’t stop your SIPs
You should not stop your Systematic Investment Plans (SIPs) in Mutual Funds. We assume that markets have already reached their lifetime high and investment through SIP won’t give the desired returns. Hence, stopping the SIPs makes more sense than continuing them. But we tend to forget that markets are unpredictable and these SIP investments actually give the advantage of rupee cost averaging which eliminates the need for timing the markets. If you have lump sum amount to be invested, you can opt for Systematic Transfer Plan (STP) wherein you can move your money from debt to equities at regular intervals.
3. Don’t act too smart
Most of the times we hurt our portfolio more by staying hyperactive and acting on each and every advice we receive from all the directions. Quoting from Warren Buffet, “We continue to make more money when snoring than when active.” Even full-time Fund Managers/Equity Analysts get their calls wrong, then how can make correct investment decisions all the times. It is very easy to get swayed when you see all the indices going green but it is very important to look at your own risk appetite and then invest accordingly.
4. Not all the stocks are going up
When we see popular indices like SENSEX and NIFTY touching new highs every day, we assume that all the stocks in the capital markets are going up. But that is not the case. It is only the stocks which are the part of the index which helps the index to move up. Remember indices don’t tell the entire story. Most of the times it is the handful of heavy-weight index stocks which move the indices. Hence, you need to be really careful while selecting your stock portfolio.
5. Asset Allocation and Financial Planning is the key
Finally, you will be able to attain your long-term goals only if you have a proper Financial Plan in place and have allocated your investment assets accordingly. In a 1991 study, it was determined that more than 90% of a portfolio’s return is attributable to its mix of asset classes and not from timing the markets or stock picking. But asset allocation cannot remain static, it should change depending upon market conditions and investor’s circumstances. Your portfolio needs to be rebalanced at frequent intervals.
Richard Ferri, CFA, rightly said in his book “All About Asset Allocation”:
Your investment policy and portfolio asset allocation will be unique. It will be based on your situation, your needs today and in the future, and your ability to stay the course during adverse market conditions. As your needs change, your allocation will also need adjustment. Monitoring and adjusting is an important part of the process.
I hope these points will help you stay in course with your investment strategies and help you build a portfolio to achieve your financial goals well in time. Remember, even the debt investments are volatile and come with underlined risk factors like credit risks, interest rate risks, etc. Hence, it is better to stick to the investments that have the ability to beat inflation and give decent returns over a longer period of time.
Charu Hastir, CFPCM is the founder of http://www.theriteplan.com/. Rite plan is an online financial planning portal created to achieve a single objective of providing easy and Do It Yourself Financial Planning to netizens. Rite Plan is wholly owned by Tikkun Olam Financial Planning Services LLP. Please visit: https://theriteplan.com/index.php?route=common/home/