Investment Objectives & Advice

Do’s & Don’ts during the Market Panic!

The markets are crashing, it has fallen from the cliff and wiped out the gains of last 3-4 years. There is flurry of queries about; What should i be doing? Is this an opportunity to buy more? Is this the end of markets, should i pull out all my money out of equity markets? These are unprecedented times and any suggestions on the current time will be an educated guess only. There are some evergreen basics and when i see lot of people breaking those & it pains. This article is to address such basics:

Should I sell in current panic? Lot of investors did ask this question, What if i sell now and buy again later. In the process, they want to avoid the chances of further losses. This is a common thought and happens with many investors, The problem with this approach is that you have never timed the market and now you want to. You are underestimating the emotional part of decision making: How would you know the exact bottom of the market? if the market stops falling and start increasing again is your indication then think again. It did happen twice when the market rallied quite a bit from it’s bottom to fall again. Most often people, who sell to buy again later at cheap levels end up missing the recovery to a large extent. Therefore, Do not sell in Panic, there can be other reasons to sell which i flagged earlier. (Should i sell now?)

  1. Sell if you want to harvest the losses to avoid capital gains tax
  2. Sell if you had to replace a laggard fund in your portfolio with another
  3. Sell if you do not have sufficient emergency corpus ( If this is the case, Please fix your basics)
  4. Sell if your goals are in next 2-3 years itself ( Not sure why you would be in equity still!!)

In equity every few 3-5 years, there is a chance of correction and if the correction is large then the recovery years can also be successive or large positives. It is not like fixed deposits (giving you consistent returns every quarter). Below is the annual return for Last 20 years in Nifty 50 TRI and the 5 yr geometric mean returns. In all years, there has been different return and even on a 5-yr horizon it could be anywhere between 0.5% (2008-2012) to 43.7% (2003-2007).

Annual Returns of Nifty 50 TRI

Should I buy with borrowed funds (leverage)? This might be a surprise to few but there are some brave souls, who want to buy in this market. They do not only want to buy with extra cash they have, but also ready to take loans. They also want to break there FD’s to buy in this market. A simple suggestions to such people in my humble opinion is that, It is never a good idea and should not be done as a retail investor. Please stick to the basics: Stay with in your asset allocation, re-balance your portfolio bi-annually or annually.

Should I stop my future SIP’s or regular investments? The answer to this question is circumstantial. I spoke to few people, who might see a challenge in their job security or might face a cash flow problem. For such people, It is ok to stop their new investments. Though if you want to stop investments as the market is falling, then please do not do it. In the volatile market, regular monthly investments help you limit the absolute downside and help you accumulate more units (Time Diversification)

Is it time to buy, should I increase my investments? Again the answer to this question is circumstantial. If you are under invested in Equity, yes you should buy more now. If you have been sitting on cash due to concerns related to market overvaluations, yes you should buy more. If your earnings capacity is intact and your saving proportion increasing, yes you should buy more. All in all, If you know the right reason why you want to buy more/ you are Ok to stay invested for long time horizons/ You are Ok to see another 15-20% fall in investments or if you are Ok to not get any returns in the next 2-3 years, yes you can buy more. If nothing else, the current market levels have brought the trailing valuation ratios to an attractive zone.

VI Index as of Mar 20, 2020

*As of Mar 20, 2020

Just to summarize, There is no universal answer. In a market at any point in time, there is a buyer & for every seller (& vice versa) for trade to happen. You should not act based on emotional reactions in the market currently but because of your plan with solid reasoning  without sacrificing the financial security.

 Happy Investing!!

 

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