With over a decade of experience and success in the field of finance and investing, leading Financial Consultant, Mehran Felfeli, owner of the investment consultancy firm, Ethix, tells us to keep calm and not make brash decisions or react impulsively to the volatile market conditions.
The Equity market has been limping over the last two years and investors are getting increasingly apprehensive by the day. Slowdown in consumption and demand has impacted our economy. Credit cycle is moving at a snail’s pace due to the liquidity crisis amongst NBFC’s (Non-banking Finance Companies) and Real Estate slowdown. The recent change in taxation laws for FPIs (Foreign Portfolio Investments) further dampened investor sentiments. Also, global fireworks are rubbing more salt on our economic wounds. There is no denying that we are in a classic Bear market, and such volatility is the inherent nature of Equity. But despite the market gloom, I write to you with great optimism.
The market has already factored in most of the negative news. The RBI (Reserve bank of India) is pushing liquidity back into the system by lowering interest rates and the government is proactively taking consensus of the current state of affairs. The Fed Reserve may lower rates due to Trump-pressure that may open the liquidity for carry trade from US to emerging markets. Corrections like these provide us an opportunity to make quality buys into Equity at lower prices. It’s like a heavy discount on your favourite brand.
Every economy goes through a cycle, there are ups and downs. We’ve endured market phases way more severe than the current situation. History has always proven that every correction has paved way for the next big Bull rally! Our economy is structurally rock-solid and there certainly is no cause for concern in the long run.
As Benjamin Graham (world renowned security analyst) once quoted, “the investor’s chief problem, and even his worst enemy, is himself, and not the market!” Investors’ lack of discipline is the most common recipe for a portfolio disaster. Therefore, to ensure your portfolio delivers, irrespective of the market condition, mutual effort from investors is also needed. The following principles have been practiced by every successful investor and I strongly urge you to imbibe the same. Remember – ‘What NOT to do’ weighs more than ‘What to do’ when the market gets volatile. It took me 11 years to learn how to make money, but more than 19 years to learn how not to lose it!
- Never compromise your asset allocatione. exposure into debt (low volatility, low returns) and equity (high volatility, high returns). It determines more than 90% of the portfolio returns. Asset allocation is based upon your risk appetite. Just because your next-door neighbour made a killing in his investments, doesn’t mean you will. Everyone has a different capacity to handle volatility, so identify and respect your risk appetite.
- Do not fall for the ‘herd mentality’ and try predicting the market, else the entire herd would have been rich, which has never been the case. There are about one million trained economists on the planet and not one of them could accurately predict the 2008 financial crisis (with the exception of Nouriel Roubini and Nassam Taleb). So much for jesters that come on business channels, trying to boost TRPs by predicting the market outlook. Long term investment generates true wealth, period. Active portfolio management (churning) based on outlooks does more harm than good. Avoid outsmarting the market, no one could do it.
- Do not panic on negativity. We fear loss more than we value gain – this is human nature. Far more money has been lost by investors preparing for correction, than has been lost in correction themselves! It is proven that people who receive frequent news updates on their investments earn lower returns than those who don’t, because they react instead of staying invested. As Warren Buffet (world’s most successful investor) quotes, “when others are fearful, be greedy and be fearful when others are greedy.” It’s easy to say but way harder to practice. It needs discipline.
- Good news and good price don’t come together. Good price to buy stocks comes only when there is bad news and bad price comes only when there is good news.
- Don’t stop your equity SIP, it’s a recipe to disaster. This is the best time to either increase your SIP or continue them. You are getting more units at a lower price. The whole purpose of an SIP is to take advantage of such volatilities. The biggest mistake is to stop them now. Unfortunately, statistics have always shown that SIPs increase most when the market is most expensive and are stopped when values are cheapest! How sad is that!!
In my conclusion, I say this – despite earlier crashes like global depressions, oil crisis, currency crisis, wars, scams, etc., our Sensex, 40 years ago, was 100, and today it is at 37,397! A yearly return of 15.80% and no asset class could match this return! Even better, equity mutual funds and stocks have even outperformed the Sensex. The challenge we are currently confronting is not even a drop in the ocean, as compared to the past crisis. Hence, with certainty, I assure all investors that the market will, sooner or later, embrace for the next big Bull rally. Patience is the key. Shaant raho….