This is a great time for the small band of intrepid financial planners of India who have solidly worked on building a client base on the 'right-selling' financial planning principle over the past 10 years
A big market move is accompanied by lots of excitement. Usually the excitement is of traders who are either kissing their screens or holding their heads in despair. Human beings tend to mimic the emotions of others near them—try being sober around a person who is laughing uncontrollably or try to not tear up when your friend is crying uncontrollably and see how tough it is not to react in empathy. Especially when there is a large market crash, the images on TV, the messages on social media and the newspapers all contribute to average people feeling that a big catastrophe has happened and they need to worry. And here is the strange thing: the real investors—that long-term equity investor who has a diversified portfolio of stocks and funds—simply have an average day at work. It is the punters, the market timers, the tip-seekers who get deeply influenced by the reactions of a market crash and spread the emotional contagion. Strangely, the most affected are people who have no stake or have very small sums invested.
Since the culture of long-term equity investing is still new in India, there are concerns about markets with new investors and those still to start making a financial plan. They worry—maybe this time it is different and the world economy will collapse with all my money in it; I’m safer in fixed deposits and land. What they forget is the slow slide of real value of money in a fixed deposit, which post tax and inflation, usually gives negative returns at the top tax bracket. Real estate is a messy, lumpy, black money-bearing, costly investment that, on an average, gives returns that are lower than equity. So, how bad can markets get? Let’s look at bad stock market events in the past in India. Let’s take Sensex closing rates from 3 April 1979 till 24 August 2015. We see that it has fallen by 6% in a single day 19 times, including the fall on Monday, 24 August 2015. It fell 5% in a day 40 times, and 4% 90 times. It fell 11% twice and, the worst, 13% in a single day, once in April 1992.
How does this look when we look at up-moves? Markets have gained 6% in a single day 24 times over this 36-year period, have been up 44 times by 5% in a day, and a huge 92 times been up 4% in a day. The biggest one-day move was 17% in May 2009 when markets reacted to the Left not making it to UPA-II (as an aside: little did markets know!). Markets go up and markets go down. When this happens over a short period of a day it makes news, a slow slide of 6% over six months is less scary but is equally harmful to your money. Looking at the ‘markets are up more than they are down’ data, should we conclude that this crash will quickly end and markets will bounce back quickly? Nobody knows. That’s the thing with equity investing—the time horizon has to be long enough to stomach the risk of a downturn and volatility. Remember that markets can be depressed for really long periods. After the worst one-day crash of 13% in a day, the markets took over seven years to get back to sustained recovery—with lots of volatility in the interim.
All those stock pickers who are rushing in to buy as the markets have crashed should remember this—market recoveries can be long and painful. All those rushing in to sell should remember that market recoveries can be short and quick. You need to be a bit of a boring kind of person to invest in the stock market. Not so excited at a fall that you rush in to buy, or so afraid that you rush in to sell. Financial planning has rules—if you follow them, you don’t worry about sudden market moves.
This is a great time for the small band of intrepid financial planners of India who have solidly worked on building a client base on the ‘right-selling’ financial planning principle over the past 10 years. To turn away an 80% first-premium commission on an investment of a few lakhs is not the easiest thing to do, especially when your business is new. Some of the financial planners on my Twitter timeline reported having a normal day at work—hardly any calls from panicked clients; others spoke of calls where people just wanted reassurance. Right selling means managing expectations of the clients and constructing a portfolio that rides out market storms. Those who built the foundation right are sitting with great client books today.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at firstname.lastname@example.org