In the last month as of 19th March markets fell 31.5%. It is but natural, to get everyone’s attention especially, for investors who have invested in lakhs or crores. But the more important question is what should investors do now? The answer depends on what mode of investment did the investor use to deploy their funds i.e. SIP or Lumpsum and how their portfolio was constructed before the crash. In other words, you have to act based on logic vs emotions as the latter, will make you follow the herd which is the most dangerous thing to do at this point in time.
1) Lumpsum Investors
Before we come to the
solution, let’s look at what majority of investors will do- they will consume
news on markets and watch their portfolio every day and will get more scared
with each passing day and redeem their money which would make their loss real
vs notional i.e. till the time one does not transact, the portfolio value
is only on paper, but as soon as one sells, he or she will book a loss and also
have to pay exit load in some cases. These investors especially, if they are
first time investors, will not enter equity markets for another couple of years
and will make their loss permanent.
There would be another set
of investors, let’s call them market timers who will sell now and will try to get
in to the market later but there is an issue there, who and what will tell them
when to get back in. What if the day they sell is the day when the market
starts going up like it happened on 20th March when the markets were
up more than 5.5% and what if it keeps on going up for the next 2 year? Alternatively,
what happens if they get in after say a 5-10% drop and the market fall 30%
further, something like it did in September 2008 where markets had already
fallen 30% but after Lehman collapsed on 15th September, the markets
fell 40% more and reversed direction only in March 2009. Too many what-if’s
right, and we are just scratching the surface here. If the investor is not an
expert, meaning if they do not have a full time job dealing with markets and
multiple portfolios across market cycles, there is an extremely high
probability that they will get it wrong and in the rare event that they get it
right, it would be just because of luck
and luck is not a strategy when money or health is involved.
To give an analogy, suppose
you are driving a car from Pune to Mumbai to attend an important meeting and
encounter a traffic jam within an hour before the expressway which looks bad.
You wait for some time and then try to take an alternate route but you forget that
there are other drivers who are thinking like you too, as a result of which you
hit the traffic jam again on the alternate route and lose more valuable time.
Alternatively, if you wait out the rush and push the pedal as soon as you hit
the expressway and as a result, increase your average speed and make up for the
lost time, you reach your destination on time. Same with markets, when you see
the opening, move to an aggressive portfolio and reach your goal. At the end of
the day reaching the goal is important, whether you had a couple of bad months/quarters
over a 5 to 15-year horizon is immaterial.
So, what does one do, just sit and let the opportunity go? absolutely not. Like in the analogy, You wait for the point in time when the upside outweighs the downside and re-balance i.e. increase your equity proportion- better left to experts who track multiple fundamental and technical indicators and know how to re-balance the portfolio in situations like these based on their experience and research vs. letting emotions of greed and /or fear take over.
2) SIP Investors
For SIPs the entire strategy
depends on diversifying across time. In
fact, the strategy works the best in volatile markets like these, where you get
an opportunity to reduce your average purchase price, even more so, when the
market falls and remains depressed for a couple of years. That being said, you
have to move to a conservative debt portfolio 2-3 years before your goal target
date as you cannot afford to lose 30% value a year before the goal date for
The other advantage of SIP
strategy is that even when you encounter these market corrections, you will see
a value of your portfolio which may be less than your invested amount till this
point in time, but it will be definitely much higher than what you would have
in your savings bank account had you not invested, it is because of a natural habit
that we all have it is called spending.
You must have heard the adage- Spending time in the market is more important than timing the market - hope this article helped you see how.
CEO & Head of Investment Research
Everguard Life Ventures Pvt. Ltd.