With over a decade of experience and success in Finance and Investing, Financial Consultant – Mehran Rostam Felfeli, owner of the investment consultancy firm, Ethix, recommends useful disciplined investment approaches to avoid making financially damaging decisions, during these uncertain market conditions. [www.ethix.net.in]
The pandemic shook the world, and ironically equity investors are singing their way to the bank. Big companies are getting bigger, reporting record earnings at the cost of consolidating MSME (Micro, Small and Medium Enterprises). The US has been playing Santa Claus, on a note printing spree! This was the precedent set for all countries’ central banks to revive from the pandemic. So, are the good days back? There was never a good or bad day for the stock market. If the market falls, we sense opportunities, and if it rises, we make money. It’s a win-win situation!
It is apt to write now when any stock you touch turns into gold at this market juncture. But, as the age-old saying goes, “the worst investment mistakes are usually made during the best times.” Every bust is a by-product of a boom. However, disciplined investment approaches have inevitably rewarded investors in the long run. You can’t go wrong if you follow them:
Respect Your Risk Appetite: Asset allocation determines over 90% of portfolio returns. It is the allocation between debt (low returns, low volatility) and equity (high returns, high volatility). How much volatility/risk can you handle, is what defines your portfolio returns. High returns come with higher risk and likewise, low returns with lower risk. Risk control is the core of any investment. You should largely emphasise not doing the wrong thing, as opposed to just doing the right thing.
Get Cautious: Practice alertness when valuations are expensive and excited when everyone rushes to sell at a discount. The worst thing about risk is that it gets invisible during market booms, and that’s when we must exercise most caution. There’s a denial of the possibility of loss during good times, as we ignore the intrinsic nature of equity. It gets more visible during adverse events. When there are no earthquakes, you can’t tell the difference!
Keep Greed In Check: The biggest investing errors come not from informational or analytical factors, but from psychological ones. Greed is a mighty force, strong enough to overcome all prudence, common sense and memory of painful past lessons, that would otherwise keep investors out of trouble. This is the primary reason investors buy when markets are high and sell when low/cheap. Fear of missing out (FOMO) is something one can’t control!
Nothing’s For Certain: In investing, as in life, there are very few sure things. Stock values can evaporate, estimates can go wrong, circumstances can change and ‘sure things’ can fail. Ignoring cycles is dangerous for investors. Many think that companies doing well, will do well forever; outperforming investments will outperform forever, and so on! Avoid getting too optimistic or pessimistic. Instead, adopt a realistic approach. Understand that every asset class bears a market cycle and swings like a pendulum. At every point, there is one asset class outperforming the rest. Today, equity is the star; tomorrow it could be debt or Gold. Real estate, anyways, doesn’t qualify under liquid investments. Do not write off an asset class because of its underperformance – it’s just undergoing a cycle.
Focus On Long Term Consistent Returns: Don’t get perturbed or carried away with short term, sporadic portfolio performances. It’s not about how good the portfolio performs in a few months or a year but whether it delivers sustainable returns in the long run. It is easy to make money in a rising market because everything goes up – the challenge is to ensure the portfolio performs even in a choppy market.
We have two classes of forecasters: those who don’t know – and those who don’t know that they don’t know. So please don’t predict, choose to be disciplined. The reward will always be fruitful!
‘Ethix’ is open to answering any relevant queries on handling your finances.
Mail him at: mehran@ethix.net.in
or visit his website on www.ethix.net.in
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