In the present state of the markets, I am remembered of a saying that was a favorite of my UK Country Manager during my stint in Four Soft as CEO – “Things can get a lot worse and they probably will, before they get better”. It is very likely that things will get worse and eventually turn positive at some point in time. Unfortunately, that does not seem to be very soon as both global and domestic factors seem to be largely negative at this point in time.
So, how should one be investing in the current markets? Is it a time to buy more as the prices get attractive or is it time to be cautious so as to avoid the proverbial falling knife? How do you tackle the psychological impact of seeing your portfolio battered everyday and your Net worth depleting rapidly? More pertinently, if you have a significant goal coming up in the next few months, how should you mobilize funds for meeting those goals? I will attempt to answer these questions in this post and try to relate the answers to my personal perspective.
Let me first tackle the temperament part that you will need to demonstrate as an investor. I will be the first one to agree that it is gut wrenching to see your net worth depleting at a high rate. I went through this in 2008 and therefore have a sense of the history repeating itself here. At such times it is important to remember that when we deal with equity as an asset class, these kind of events are bound to occur once in a while – sometimes for a short time frame but at other times they can be of prolonged duration. If you are the kind of person who worries over the portfolio value every single day, then it may not really be a good idea for you to park most of your money in the equity asset class. Remember, you cannot do very much about your earlier investments now. If you have time on your side then hope that markets will recover, later if not sooner, and wait. Doing things like getting out of equity etc at this stage will be suicidal, as it will be to invest much more in it now without thinking deep.
Now assuming that you have a calm temperament and are clear that you need to let your investments play out in the long term, what should be the strategies in this period of considerable turmoil? If you are having 3 portfolios like me in Debt, MF and stocks then this is what you should be doing:-
- Keep investing in Debt as per your earlier plan. Do not decrease it believing you are following the Asset allocation principles. Absolutely resist the temptation of bringing in earlier debt investments for buying equity now.
- While you need to keep your Debt investments going, there is no need to go overboard and put everything in Debt. Remember, asset allocation principles largely hold so as your portfolio value decreases for the equity component you actually need to invest more to maintain the asset allocation.
- All the MF SIP that you have done over the last 2 years would have plummeted in value now and will probably go down further. Irrespective of the term you had in mind, it will not make any sense to redeem these now.
- Continue with your SIP as the markets are likely to remain depressed for some time and this favors SIP mode.
- Use your surplus cash to add to the MF s you are invested in. Market crashes are good opportunities for adding to your existing portfolio. This is also a good time for making one time purchases in MF you were considering for fresh SIP.
- Add to your existing stock portfolio, whether you are an old or new investor. You must follow the basic rules of being selective in picking good companies, using price triggers to buy, buy in small lots and deploy your money regularly over a period of time. These principles are always important but even more so in these times.
- You absolutely need to avoid buying on tips or chasing multi-bagger stocks in this market. Remember, it is possible for stocks to lose ALL their value unlike other assets.
So far so good – but what about people who may be having a significant goal coming up or who may even be retiring in the next couple of years or so? They do not really have the time to play long term, do they? Here is what thy should be doing :-
- For any goal coming up, evaluate the possibility of postponing it. This is especially true for consumption oriented goals such as buying a car, taking a vacation etc that you were hoping to fund by redeeming MF or stocks.
- If the goal is such that cannot be postponed, such as children’s admission to college then first try to check the possibility of funding it from your active income. This will mean that you have less to invest, but that is far better as compared to the option of redeeming from MF or stocks in this state of the markets.
- In case your active income cannot support the goal amount, look at redeeming part of your debt portfolio. You can consider debt funds and similar instruments first and thereafter look at PPF. Redeem only the cash that you need today. For example, the college goal may be 15 lacs but in the first year you will only need 4 lacs. Arrange that for now and simply wait for 1 year to take decisions at that time.
- If you are retired or in a Financially independent state, check how much reduction in dividends etc will impact you. This has to be addressed through other sources and again the last option will be redemption of equity.
- In general this is a good time to be conservative on discretionary expenditure.
I wanted to cover my personal strategies of investment too but this post has already got too long. Let me come back tomorrow and write on the same.
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