Biggest market declines happen over a brief period of time but gains occur steadily, says Dhirendra Kumar
How to know whether the market will be bullish or bearish in the coming days? During COVID times, the market is going unpredictable. I thought it would go down in April and May but it did not.
- Jeenu Jensi Toni
Ordinary folks like us should stop thinking when investing in the market. Just make your plan and work on it continuously. Don't get distracted. Nobody knows how exactly the markets will behave. We could not anticipate the crisis and the virus. And we don't know how bad it can be or what surprise the market can give. There are three things that can happen to the market at any stage. It can go up, it can go down or it can go nowhere.
Whenever you face this situation, the only thing I think you can do is to ensure that you don't need the money for a couple of years. That is the rule number one. But at the same time, we should have a belief that beyond a point of time, it will go up. It is a general bet on the economy. That is the belief that I have. But I don't know about the precise timeline, whether it would be six months, one year or two years. It is very difficult to anticipate. Moreover, it is not worth doing it.
So, let's do some simple things. Keep the money that you need in the immediate term in a fixed-income instrument, be averse to any risk and start your SIP with the money that you don't need in the short term. If you have a lump-sum amount, spread it over a period of time and stop thinking about what is going to happen to the market.
If, at all, you have some great temptation to benefit from some big moves in the market, then keep 10 per cent of your money for it. And frame that rule. If the market goes down by 20 per cent, you will invest half of it. If the market goes down by 30 per cent, you will invest the remaining money. The problem of trying to time the market is that when the market goes down by 20 per cent, you will keep waiting for it to go down further and one day, it will suddenly make a comeback and you would start waiting for it forever. We will keep waiting for the most opportune time and that is the biggest risk. So, I would say, the dominant part of your money, say about 70-90 per cent, should be invested in an automated plan, as it is very hard to guess the market. And keep a small part of your money (10-30 per cent) in cash and feel happy about it. Frame your rules and be specific like instead of the market going down by 10 per cent, be specific about 10 per cent from what level. All the big declines happen in a brief period of time, while all the gains happen steadily. So, you don't know when the market rises but you really know when it falls. Have your plan and rules in place and follow them.