Investment Objectives & Advice

Balancing the Pessimism with Optimism!

“We live life forward and understand it backwards” – Kierkegaard

In my last article, I ended the discussion by saying that don’t be the last FOMO buyer. This has touched lot of readers and emails poured in with questions: What would happen to the market/ Should I sell now and buy later at cheap levels/ Should I stop my monthly investments etc. Though my answer to every question was different because its personal finance and it should be personalized. The swings in market so far in this year has been quite wild, from the fastest fall of almost 40% to up +60% from the bottom. It might be bringing all kind of emotional reactions to your investment decision. Therefore, we will try to understand emotions first before deciding the course of action.

In my school days a common quiz among the kids was to draw a line on the board and ask the person to make it smaller, without rubbing it off. People always struggle to get it (simple answer in hindsight), just draw a bigger line next to it & by comparison you make the original line smaller. The actual term for this is the contrast principle and a good explanation of the brain puzzle could be done with the three bucket water experiment. Three buckets X, Y & Z are filled with water cold, hot and normal. When John was asked to put one of his hands in both buckets X & Y, Then he puts his both hands in bucket Z. John is getting the mixed signal, he is convinced that Bucket Z has hot water as well as equally convinced that Bucket Z has the cold water. What’s the Truth??

Investing process is the same, If you keep looking at the daily market moves you brain is going to generate all kind of signals and prompts you to action and confuse. At any given point there are always news highlighting the negatives and positives in market. If the earnings have fallen then the expectations for earnings in future have increases. If the P/E valuations are too high then the liquidity is unprecedented and interest rates are too low. if the economy is slowing then Govts & Central banks are taking extra ordinary measures to re-ignite the growth. People, who were chasing the rising tides in the late 2019 or early 2020, had the heart attack in March with steep fall so now they are feeling blessed and want to get out of the market for good. There are also people, who invested in March and now feel they are absolute genius. And then there are those, who are watching from the sidelines, feeling that they missed the rally to repent, may be ready to jump in during the next 4-5% correction. This is what makes the healthy market a presence of a buyer and seller all the time.

Now, Let’s come back to the original question. What should an investor do in the current market conditions. To simplify we will talk about the three investor categories:

  1. Investors in the early part of their accumulation, who still have 2-3 decades to hold onto their investments and still growing towards their desired asset allocation; the swings in the shorter period do not matter so stop worrying and keep doing your SIPs.
  2. Investors with a decade of investing history under their belt and still having a decade or so to go on, they already should be touching to the required asset allocation in place. Therefore, just create a band of +/- 15% to the desired asset allocation. As the markets move into higher valuation zone cut the exposure to equities and vice versa.
  3. Investors in the final lap of investing journey, equity is a volatile asset class and in the last lap you don’t have lot of margin for error. Make sure you do not expose any money in the risky asset class unless you can afford to loose or wait for a decade or so before you need it.

Investing is simple and it does not need to be more complicated as other things we deal with. Get the list of asset classes & products you need to invest among Equity, Debt & Gold and ascertain the monthly amount you need to invest in every month for your plan. Each month just stay disciplined to put your money to work. If you don’t like an asset class, just move that portion of money in that month to next best option. Don’t keep your money idle!

P.S.: Simple use of investing rules can take away your emotional biases. Check our section “State of the Play” and subscribe to our blog with email.

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