The
initial period of a crisis always holds conflicting information, and is not
ideal for investing
UMA SHASHIKANT
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.
