The Biggest 2 Day Market Rally, Now What?

The Indian market saw its biggest two-day rally as Sensex climbed more than 3,000 points between Friday and Monday (Sept 20- Sept 23, 2019). While it made for a great headline, some investors lost big time on those 2 days. The investors who decided to stay out of the equity markets lost out on a huge opportunity and the even bigger losers were those who decided to pull out their investments last week as the Sensex plummeted down below 36,000 just a day before on Thursday, levels it was last seen around 6 months back on 26th Feb, 2019.

I do not blame these investors; fear is a very strong emotion and often drives out rationality when one needs it the most. The investors who really benefited were the ones who decided to stay invested and followed the often used principle by markets experts that “Time in the market is more important than Timing the Market”. Sounds good in theory, but hope events like these help investors convert theory in to practice.

You may have heard or read versions of above story in the last couple days, but a more important question that investors are asking now is, how should the invest going forward? The following paragraphs help address that question.

The event i.e. the government’s decision to slash corporate tax rates significantly for companies last Friday which caused the market rally, has undoubtedly changed the trajectory of India’s economy for the better as it will boost investments and inflows of foreign capital in the mid to long term. That being said, we must be cautious in the short term as the chances are that animal spirits may take over and elevate the risk. Please don’t forget that the global economy is not in a good shape, the trade wars, rising debt levels and the rise of populism across the world are for real and if the markets rise faster from here on, volatility will increase and the markets may head down again.

However, don’t let the doom and gloom of the last paragraph get to you, as your fear may guide you to take that irrational decision to wait on the side lines like the investors I discussed earlier did. What I am really proposing is that you should continue with your investments and even consider making some new ones, if you have the additional capital. Just ensure that the portfolio allocation is conservative as it will help you retain the value of the investments when the markets correct and you can switch to a more aggressive portfolio to generate significant returns in the next upcycle. Some investors may interpret conservative portfolio as one which has only cash, fixed deposits or insurance based investment policies. These banking and insurance products do more damage to your wealth in the long term. The conservative portfolio which I am referring to, has a lower equity portion and higher proportion of debt instruments which are of high quality and exhibit lower volatility.

In conclusion, do remember that time in the market is always better than timing the market. So, stay invested, and have the patience to switch to an aggressive stance when the market pitches you the ball that you can hit out of the stadium.