How to steady your investment ship in a stock market storm

Publication: The Economic Times Mumbai; Date: Jun 12, 2008; Section: Personal Finance; Page: 19

Riding out volatility can be a gut-wrenching exercise. Be cautious when the market is soaring and move in when the stocks are down in the dumps

Every equity investor is a longterm investor until the market falls. Rahul Ahuja is one such investor. He ( all of 40 years old) is a small business owner who seemed to understand the risk associatedwith the equity markets. His equity exposure kept going up last year with the booming stock markets and there was a point where he had around 95% allocated to equity.

“Oh, I am a long-term investor and I can afford to take risks,” Rahul used to say. However, saying that you can stomach volatility and actually going through it are two different things. After seeing his portfolio plummet by 40%, his long term seems to have changed from 15 years to 15 weeks.

One of the key things that investors like Rahul forget is that emotions play a very important role in the investment process. However, the cardinal rule is to remember that when the markets are good, be cautious and when they are sad, rejoice and enter them.

Up until the start of the year, people were exuberant about equities as an asset class and would sing praises of the opportunities available in the Indian markets. Similarly, it had become an expected norm that equities would go up by 30% every year. When the reality has now hit most investors that markets cannot go up forever, they worry about their investments and wonder whether they should have been in equities at all. This is precisely where most people go wrong and you should enter the market in a staggered manner regularly on every sharp fall.

No structural bull market goes up in a singular and linear fashion. There are periods of irrational rises and intermittent sharp corrections. The market rose very quickly from 15000 to 21000 but it took only a few weeks to come back to 15000 levels. We are in a situation where the market is treading the water for a while before the next up move can begin.

The key questions: Have we hit the rock bottom and if yes, when will the next upward move begin? Frankly, there are no straight answers for these questions. But then, don’t let the fear of the markets threaten your investments. If you have started an investment programme, don’t just change your tracks just because the markets have changed their tracks.

Look at what has really happened and see how best you can benefit from it. Investing is a continuous learning process. You learn all the time but your best lessons will always be learnt in the backdrop of such sharp and broad corrections. These are times when you also understand that the promises of highest returns that brokers, fund houses, insurance companies, and agents have been doling out were actually nothing but lies of the highest order. You learn to question your own decisionmaking process and how relying on fancy projections can be injurious to your financial well-being.

You need to do an honest introspection of your own emotional behavior and how you really react under pressure. Understand how you have reacted during previous falls and rises. Analyse your self critically in the context of your equity investments and overall portfolio. Based on your responses, you should decide whether you can ride tough times, or look out for exit opportunities or a combination of both. The author is the director of My Financial Advisor

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