The initial period of a crisis always holds conflicting information, and is not ideal for investing
When the stock markets are volatile, you always hear conflicting views. Optimists will prod you to be a smart investor and buy when there is blood on the Street. Pessimists will announce the end of the world and ask you to take what is on the table and flee. Investing is that kind of activity. Much as we love to control how our money will behave, there will be unexpected twists and turns. It is easier to discuss risk and how it is an important part of investing, when the going is good. When simple investors see the price of their holdings fall each day, it is tough to make decisions. Here are some pointers to think about.
First, do not be taken in by the temptation to time the markets. Many investors are convinced that if they did not get the timing right, they would make no money. People who say they should have booked profits have actually allocated too much to equity as an asset class, or to a specific product. Think about it. What would you do with the profits that you book? If you are reinvesting, you are adjusting the amount you invested in a stock or product, that is revision. If you are keeping the money in the bank, you are underweighting stocks and overweighting cash, that is rebalancing. Always consider your choices strategically(long term perspective) and not tactically (Short term adjustments to the long term plans in view of opportunity- not suitable for short term investors). Align your decisions to your goals, not the markets.
Second, do not try to catch a falling knife. Professional investors have the benefit of systems that track their positions and profits. They have to implement tactics that can help them compete in a tough market. Simple investors, saving for life’s goals, should not take risks with falling markets. See a falling market for what it is—a steep correction in prices. Do not see a falling market as an opportunity.
Third, act with deliberation. It is easy to be carried away by the panic selling seen in trading counters. Traders take short-term positions and keep a sharp eye on their capital. They pay margins and incur interest costs on open positions. As prices fall, it is tougher to find money for margin while losing on an open position. That is why they sell quickly and panic in a market crash. Don’t imagine yourself in a position that is not your reality. Your funds are yours and not borrowed.
Fourth, a falling tide takes all. After the IL&FS fiasco, non-banking stocks fell due to the fear of downgrades and defaults across the board. Stocks of top lenders with great credentials also fell. Some correct more, some less, but there is all-round correction. This means that the market is reworking the valuation of stocks, based on new information. It is not an immediate buying opportunity, though many will be tempted to see good stocks selling at lower prices. A correction means the definition of what is good and what is no longer good is being altered. A bad balance sheet cannot be corrected overnight. Do not bet too early on what is resilient. Do not buy or sell in haste.
Fifth, watch carefully for clues. When the noise settles down, and when there is an actual concrete plan of action about the defaulting large business, that is when real recovery will begin. All the ups and downs till then will be driven by rumours, speculation and panic. It is not necessary for you as a long-term investor to act preemptively and try to jump ahead and go in ‘before the information is in the price.’ To build a quality portfolio, there is always time, and greater the deliberation, better the output.
Sixth, evaluate what you have carefully. While you are trying to look at the market and identify great opportunities for buying, what you are already holding may be telling you a story. If your stocks are falling steeply and failing to recover even with good news, you may have to book your losses. And if you bought some sector fund, or some specialty fund, you will have to jettison them. In a risky market, quality matters above all else.
—The writer is Chairperson, Centre for Investment Education and Learning
Disclaimer: This article was not written by me. It has been taken from economic times and the author is UMA SHASHIKANT. The advice in this article is very practical and resonates with the motive of my content in general, which is mostly long term analysis. I take no credit for the content. I came across this post on ET and thought of sharing it with me readers due to the educational nature of the article.
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