How must an investor react? | Value Research How must an investor react?
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How must an investor react?

How must an investor react?

On the one hand, you have news of U.S. Democratic presidential candidate Barack Obama making history. He managed to a raise a record-breaking $66 million in August for his campaign. That figure was just for one single month!

On the other, you have news of Lehman Brothers, a 158-year-old investment bank, saddled with about $60 billion in soured real estate investments. Choked by the credit crisis and falling real estate values, it made history as the biggest bankruptcy filing ever.

Meanwhile Bank of America has agreed to buy out Merrill Lynch in an all stock deal originally valued at $50 billion.
Lehman Brothers was not that lucky. Not only was there no buyer offering to bail it out, but the U.S. Treasury too refused to chip in as it had done in the case of Bear Stearns, or with mortgage giants Fannie Mae and Freddie Mac.

The repercussions were felt across the globe. The dollar fell to a 2-month low against the yen. The rupee touched its lowest level in the last 2 years to close at Rs 46.05/dollar on Monday as net FII outflows crossed the $8 billion mark this year. 

The price of gold, regarded as a safe haven, moved higher. But as oil prices dipped below $93/barrel and ETFs sold gold, the price of gold too slipped. According to a Reuters report, the world’s biggest gold-backed ETF, SPDR Gold Trust, said its holdings have fallen more than 37 tonnes or 5% since the beginning of this month.

China’s central bank cut interest rates for the first time since 2002. India may not follow suit immediately but the general consensus is that domestic interest rates have somewhat peaked.

The market, meanwhile, reacted violently. The Sensex witnessed an intra-day fall of 850 points on Monday but recovered to end the day at 13,531, a fall of 470 points over Friday’s close of 14,000. On Tuesday, the Sensex opened with a negative gap, touched a low of 13,052, remained range-bound before aggressive buying saw it close at 13,519. Wall Street was not that lucky. It experienced its worst trading day since 9/11.

So what should you do as an investor? Don’t panic and sell. Yes, we know that these are extraordinary times and it does appear that the world is falling on our heads. But the only smart move you can make right now is not to act hastily. If you have an SIP, continue. If you don’t need any money in the near future, don’t sell your shares or fund units. We are not saying we know for sure that the market will bounce back soon. But this too shall pass!

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