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 years? 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 obvious reasons.
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.
Disclaimer- I have not looked at my portfolio once in the last 3 weeks and have not sold any of my funds or shares in March 2020 to make speculative gains or avoid losses.