There are three things you should be absolutely clear about. The first is that you do not know when it is “safe” to get into equity. No one knows or predict that. No one knows when the bull run is ready to resume its pace. The second is the wrong assumption that it is alright to change your asset allocation guidelines as and when it pleases you, with no regard to a change in your personal situation but with sole reference to the market situation.
The third is that your gut-level feel about the end being near is a good recipe for disastrous investment decisions.
If you have been investing via a systematic investment plan (SIP), please continue the practice. There is no reason why you should stop. And, if you have not been investing via a SIP, please start.
Don’t try to invest lumpsums when you think the market is at a low. The same goes for timing the cycles of other assets. When equities are down, investors tend to find solace in what’s perceived as “safer” — recently, that was gold.
When the prices fell recently, they were a dismayed lot. If you do not have a valid reason for investing in a particular investment or asset, stay away.
You will be rewarded for staying cool
It’s not easy to step back for perspective when you are gasping for air as your portfolio value plummets. But any sensible long-term investor will tell you that bear markets are setting up the next bull market. They are also keenly aware that bull
markets don’t run forever. So it is only natural that in a volatile market, expect some short-term losses to your portfolios. Even a great company’s stock can get banged around in a tough market. But that does not make you a loser (though you may look like one).
While the old “buy and hold” mantra may seem like cold comfort in times such as these, rest assured that it has a better long-term record than market-timing.
The problem is when you let your emotions get the better of objectivity. Financial planner Gaurav Mashruwal says that there are three predominant emotions that rule the market: Fear, greed and panic. For instance, in 2002, investors were afraid to enter the stock market. The past collapse was too fresh in their minds. Around 2005, the masses began to enter the stock market. Soon greed took over and they began allocating huge sums of their portfolio to stocks. When the market crashed, there was panic. Once again, we reiterate that now is a good time to get into equity and you will be rewarded if you have a time frame of at least three years. So, the problem is not with the asset class but with the approach to equities and your investing strategy.
This too shall pass
Remember that bargain valuations are available only in these days of plummeting equities, high inflation and interest rates and a global slowdown. But the key is to understand whether “such” times are temporary or long-lasting.
Over time, all issues will be resolved. As long as the fundamentals remain strong, we have nothing to fear. If the fundamentals deteriorate significantly, the reverse will be true.
The structure of the economy, the strong corporate balance sheet, increasing household income without too much debt on their books, rising consumption levels and high savings rate will ensure that the slowdown in India is not severe. Equities have fallen before and they will fall again.