Despite market fall, stay invested for better returns
While my last week's article has concentrated on the massive opportunity in the debt markets, I would like to focus on what the equity investors...
While my last week's article has concentrated on the massive opportunity in the debt markets, I would like to focus on what the equity investors should do now. The 21-day lockdown is already turning each one of us restless owing to the limitations and restrictions on our movements. When being healthy, none of us would've remained indoors for these many days at a single stretch during our entire lifetimes. These are unprecedented times and so the response should also be unreasonable to overcome the adversity.
There were and still are calls for the markets to remain closed during this period as we have witnessed an extraordinary volatility that has broken all previous records. The events are turning out to be unparalleled in our known history and this uncertainty is destabilizing. However, lockdown is also teaching us new ways to lead our lives while reducing action at least physically. The precipitous and continuous fall in the markets has turned many investors edgy
This is just a reflection of the collective hesitation of the market participants. The fall was so sharp that we'd seen two lower circuit trading days in just 10 days, the only other prior instance was only more than 10 years ago. That shows the intensity of the fall. Foreign Institutional Investors (FII) have been the largest sellers and the month of March has seen the highest-ever sell-off by them in Indian markets. The primary reason being the flight to safety amid global slowdown concerns and also the rush for liquidity. The major sellers were hedge funds who had redemption obligations and also sovereign funds especially those from oil-producing nations due to a sudden drop in crude oil prices. This has led to markets incurring huge losses and also very sharply. The quantum of correction in such a short period is unheard of.
For many investors and advisors, this corona crisis came as a bolt from blue, with no leeway to act or short cover. Further, no one can say with certainty whether markets have bottomed out or there will be more pain in the offing. Then, what should the investors be doing now? We tend to experience invincibility and overconfidence at the peak of the markets, But when the markets turn tide against us, we turn skeptics.
Nevertheless, inaction is the best course of action during times like these. But there's another school of thought which says it is better to enter markets at lower levels. In this case, the problem is with timing the entry. Assuming that markets would go further down, identifying the bottom precisely is an issue. Further, how much of the risk-off cash should be pumped back into the equity? These are pertinent questions for which one needs answers before following any of the strategies. Markets have fallen to historic lows. They will obviously recover in years if not months. However, hindsight bias leads us to arrogance, which makes us to take risk, paving way for bad decisions and then for lower returns on the investments. The fact is that no one actually knows whether the stock market will enter a bear market soon or not. If it slips into bear zone, then how long that bear market will last? That way, these are trying times and the best way to address such issues is to stay invested. As Prof Elroy Dimson was quoted as saying on risk, more things can happen than will happen. So, one can't predict how a risk impacts you. But having prepared to invest in a riskier asset, one has to be committed to that. Of course, the question wouldn't have arisen if the asset allocation was in tandem with the risk profile.
If the investor has the stomach to bear the pain of possible short-term losses, they could add more to their existing equity portfolios than moving away from them. History reveals that medium-term returns after such sharp falls have been pretty encouraging while it's difficult to remain unaffected. One needs to list down one's thoughts on how he or she is feeling during these circumstances. It is better not to be judgmental. As for investments are concerned, it's better to stick to systematic infusion into equity or adding up in falls to make higher returns over the long-term.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at firstname.lastname@example.org)