Home / Opinion / Road rules to follow when markets run fast or slow
Back

The markets are currently taking a breather but as we pull out of the economic downturn, they will get a fresh burst of energy. The ups and downs of the market in the past three months seem to unnerving investors who are seeking equity exposure to their money. All investors in equity need to remember that markets in the short term are capricious, but reflect the earnings of the corporate sector in the long run. The BSE benchmark equity index, the S&P BSE Sensex, has returned an average of 17% a year since its inception 36 years ago. If you had invested 1 lakh 36 years ago in the Sensex, it would be worth 2.8 crore today. Investors just have to get it out of their head that the stock market is a place to double money overnight. It is a place to double money, but not overnight. It is a slow cook that makes money stay ahead of inflation at best. Here are four things to not do when the markets are falling or rising.

One, don’t wait for the market to reach “rock-bottom". When markets begin to fall, people begin to put off investments waiting for the lowest value of the index. To catch that market low, you have to be really lucky, since nobody can predict the day that the market will touch the low for the year. As a retail investor, it helps to remember that the difference between investing on the day the market was the lowest in the year and the day the market was the highest in the year, over the long term, is statistically insignificant. Stagger your investment over a few months if you have a large lump sum to invest, but don’t wait to choose a day and then dump all the money at once.

Two, don’t stop your investments “waiting for the market to recover". Why would you do that? Why would you wait for something to get more expensive before you buy? This behaviour comes from the fear of losing money. It is a legitimate fear, but once you know that you are in a good product and that you are in it for the long haul, it makes sense to buy more when it is cheaper. The psychology of waiting for a recovery comes from not being confident of the products you own. Put in time at the buying stage and then keep funding the product.

Three, don’t get greedy. Don’t listen to “winning on the market" stories. This is true when markets are on a tear and everybody is a stock market expert overnight. Small wins give people confidence about their ability to “beat" the market. Truth is that the only thing that gets beaten is your money. For the pleasure of boasting in your social circle about tripling money because of your unique market skills, don’t risk your retirement money or that fund you created for your kids’ education. Long-term, if you make more than inflation post-cost, you’re doing just fine.

Four, don’t enter dumb contests. Be careful of high intensity ad campaigns that use celebrities to get your attention. Remember that the beneficiaries of trading are brokers who make a commission from each trade (buy or sell). Remember that the broker will enjoy your “float" or the money you move to their account for trading and the brokerage as you trade more and more to win. Stay away.

End note: Regulatory rework has always been a band-aid after a major financial crisis. The 1929 Wall Street crash prompted the setting up of the Securities and Exchange Commission, Federal Deposit Insurance Corporation for depositors and the Glass–Steagall Act to separate deposit-taking institutions from investment banks—the riskier part of the credit business. The 2008 crisis triggered another round of policy action that is resulting in more piecemeal regulatory change with the Dodd-Frank Act.

However, recognizing that regulatory reform needs a deeper rethink, The (Paul) Volcker Alliance has put out a report titled Reshaping the Financial Regulatory System, which aims to do just that: “reorganize the current regulatory system". See the report here: http://mintne.ws/1L4N0P7 . Three comments. One, if rethinking the regulatory architecture to build a machine that will work for the next 50 years is the goal, Volcker should read the draft Indian Financial Code to rethink what they are trying to do (http://mintne.ws/1FlvlBt ). Two, consumer protection has to be at the heart of a regulatory system and not an after-thought, as it appears in this report. Also, understand that retail customers need a ‘seller-beware’ marketplace. Three, by leaving out insurance and mortgage from the scope of the reform, the seeds of regulatory arbitrage are already sown. It won’t work.

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 expenseaccount@livemint.com

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout