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Investing in Tough Times

Its about time to take stock of what is been beaten down but with fundamentals that will do well. A worse thing to do is panic and stay out of the market entirely. In that case, you are likely to miss the upside or a great part of the upside

I was getting numerous letters and e-mails, which show the pain many investors are going through -- watching their growth investments only fall. Many of those who got sucked into the technology bubble are hurting. And the week's event has only added to the prevailing uncertainty. They're anxious and unsure of the next step.

Do's and don't Now
Running for cover, I have come across investors who want to be fully in cash. While it's impossible to predict what will happen to market as the events unfold. But indiscriminate selling will not help anyway. This will be an overreaction and the worst thing one can do is sell at the bottom. Selling now will make sense if it turns out that stocks would continue to fall over an extended period. One can not predict if that's likely to happen, but it's far from inevitable. I don't know if the Sensex at 2800 is the bottom of the current bear market. But thinking about the long-term economic impact on the Rs 22,000 crore Indian economy does not seem too great compared to problems we're already facing -- the economic slowdown and retarding FDI. The crisis at its worst will be a short-term issue but not a long-term problem.

Uncertainty drives fear as well as greed. And investment decision solely based on either could be injurious. Last year uncertainty powered greed. The current uncertainty is scary. We know well what happens when we buy, but don't know why. Likewise, if we sell in a panic without waiting to find out why, we are likely to throw away good investments in the process. Don't act on uncertainty. Go with what you know -- your plan based on your income and spending needs in desired time horizon and risk tolerance.

What to do in all times to come?
The key lesson from the events of the last year - adhering to the basic principles of investing and avoiding rash decisions prevents you from ulcer. Investors who had properly allocated their assets aren't in bad shape. Ignoring your investments won't make it better. To stop investing because (the market is) down, also won't help. Stocks are on sale. This may be the worst time not to be putting money in stocks?

What will help you most is a plan -- and it'll make you feel better. Anxiety comes when you don't know what you are going to do. Once you have a plan, the anxiety level will come way down.

First, assess your current holdings. Does it still make sense to you? For instance, are you still too exposed to one sector such as tech? It may be time to rebalance. But to rebalance, which ones should you get rid of? I will suggest a simple test -- If you had Rs. 10,000 today, would you buy that fund/stock? If not, then sell it. If it's yes, hold on to it and pray for its turnaround.

Don't just get out of investments in a huff to stop the bleeding. It's too tempting to sell and move into a more stable investment, waiting for the market to rise before going back in. But that will mean -- selling low and buying high.

So many people don't make money only because they buy high and sell low, and never get it right. An honest assessment of your risk tolerance can help, as we normally tend to underestimate how much risk we can take.

Use new money to diversify: If you portfolio does not represent a good diversification for your money, you can use new money to correct your mistakes. It might take some years but start to diversify your portfolio. The peril of concentration is too painful, as we tend to ride all the way up. And after being there - get so attached and greedy, that we also go down all the way nowhere - left high and dry.

Don't bet big on another popular investment: With the equities meltdown, it's tempting to invest in everything but equities / equity fund. But it would be a mistake to move all or most of your holdings into another popular investment, such as bond funds. You run the risk of concentrating your money again. It's better to keep a balance, since investing styles have a cycle. Its about time to take stock of what is been beaten down but with fundamentals that will do well. A worse thing to do is panic and stay out of the market entirely. You are likely to miss the upside or a great part of the upside.