Dhirendra, there's so much uncertainty that an investor has to deal with - election results, RBI's stance on interest rates, US-China trade war. What should an investor do?
Dhirendra: Most investors have to help themselves, as it is all about trying to focus on what you can control. You can't control any of the things that you mentioned. Neither you can control the things happening because of the US-China trade war and the tension between India and Pakistan nor you can predict the election outcome.
Nobody knows the actual outcomes of these events and more importantly, how the markets will react to them. You have absolutely no control over all the external things. I would rather call them noise. And the only way to deal with this noise is to have a simple plan and focus on controllable things.
What you can control include-having a careful assessment of the money that you may need in the near term, the money that you may need in the medium term and the money that you may not need for a long period of time, which is your long-term investment. Accordingly, earmark the money to appropriate assets and be regular with your investments. Also, don't get carried away by the wild swings of the market.
I remember one of my friends, who has all his savings accumulated in the market, calling me. He got this news from somewhere that the market would tank and drop freely to a new low. So, he wanted to check if it was time to pull the money out and wait for the time to put this money in again. After six days, when he called me again, the market had gone up by 10 per cent! So, no one knows exactly what will happen. Just don't speculate.
Only focus on the controllable things and worry a bit about them. You may tweak your allocation or follow a more conservative one.
But don't get unnerved by market swings.
If you are not well configured, you will panic. For example, if you have put your short-term money in equity and its value fluctuates, you have a reason to worry. So, it is important to align your money with the right time frame.
So, you are saying that we should keep our investments and approach very simple and aligned with a time frame. But what about the instances like the ZEE issue and the IL&FS issue, which are bound to affect you?
Dhirendra: Yes, these are real issues, which cause greater anxiety. But to deal with them, you have to diversify. No doubt, they create a lot of noise and can be potentially harmful too. But this is where diversification comes in and that is why, you invest in a mutual fund. If you have Rs 5 lakh or Rs 50 lakh or even Rs 5 crore invested in the market through three mutual funds, I don't think all of your money would be invested in such securities alone. It would be only 1 to 2 per cent that will be exposed to such securities. This is how diversification works.
So, you should first focus on the things that are in your control. Align your money with your experience and the time frame. Second is to believe in diversification. Diversification is the only shock absorber that you have.
So, we should emphasise on things that are in our control. But as part of my investment strategy, what should I keep in mind during times when the markets are exceptionally volatile?
Dhirendra: One is not to get worked up after listening to the news. Develop some frameworks of filtering the noise. When you listen to some news and think that it can be very bad for investments, just pause and recall similar things that happened four to five years back and assess, did it really hurt? What happened after that?
Also, we keep listening to election results. What I've observed in the last eight elections is that the behaviour of the market is random. Sometimes it goes up, sometimes it goes down but generally, there's no effect over a long period of time.
So, having the basic rules in place, devising a mechanism of not getting overwhelmed by the noise and having your allocation in line with your time frame and experience are precisely what you need to do. Just stay calm, ignore the noise and spend less time consuming the news.
Also, do not time the market or get speculative. Just be consistent with your investment plans, as many times I have seen that all this anxiety builds up more with those who get excited about investments and start taking it as a game. When the play gets rough, they try to run away. It's not a game. It is actually buying your future. You are just postponing consumption. So, you have to be really consistent and methodical about it.
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This article was originally published on April 09, 2019.
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