Sonu Mittal is perplexed. The blue-chip shares she has in her portfolio have been falling steadily this month. There is no respite in the fall and despite a better fundamentals in her stock pickings, it has only been a one way street: downward. In this scenario, what are the options Mittal has?
With the volatility in the globe today, more so the reason to keep your calm when the world around you is going berserk. The basic principles of investment ? asset allocation with a time horizon, taking into account your risk profile and liquidity needs ? were never more called for. When in doubt, my take is follow your gut instinct as any successful investor and fund manager will say luck does pay a part in the success. Investment besides being an art is also a science. You pick up stocks based on fundamentals, only to fund that the in the holding period, other stocks (which are not in your portfolio) have turned multibaggers. You lose your patience and sell and then the stock you had sold starts moving up.
The season of scams and protests have only added to the current uncertainty. The market gets a whiff of information by the regulatory authority on a particular company and if negative, the stock goes into a downward spiral. You would not contemplate whether the stock was bought in the first place based on fundamentals or on the recommendation of your neighbour or office colleague. Well, tips-based investments, more often than not, gets a noisy end.
With the equity market not immune to global shocks, it is important that global events along with local ones are factored in while making investments. The price of crude comes down, the price of gold goes up (not always a correlation). The price of crude comes down, better for the Indian economy, as inflation rates will come down. Hiking of interest rates make the cost of capital dearer, which in turn has an impact of debt-laden corporates.
Asset allocation is the fulcrum around which the investment strategy should be based upon. Not having one or ignoring the same is detrimental to your financial health. Asset allocation gives you the framework on which the investments are structured and built, along with the asset class in which investments are effected. In the current scenario, you would have carried out a portfolio rebalancing exercise, in line with the current market scenario.
Tactical asset allocation ? wherein you book your profits and move the funds temporarily to liquid funds or cash, would have paid huge dividends and protected your portfolio from going down.
Infrastructure stocks or broking companies? stocks that you have in your portfolio have been pulling down your overall portfolio return. However, you can?t let them go. In spite of seeing no action in these sectors and the opportunity to re-enter when the investment horizon is in better shape, you simply take no action. You try to satisfy yourselves (or is it your ego?) by stating that ?this is a long-term investment?. Have the courage to accept your mistakes and cut your losses. There is an opportunity cost involved.
How many of you, when you invest, have a predetermined number for booking your profits and cutting your losses? Discipline is one of the factors that will determine your gains/losses. The hit-miss ratio of a disciplined investor in the long run is always higher than for the one who does it on whims or fancies or on emotions. Remember, investing is not only logical but also emotional. It is easier to say buy on fear and sell on greed. It takes emotional maturity to undertake this contrarian approach.
Patience is a virtue in investing. At times, no action is the best action. If the global investing scenario is weak and you expect the markets to be bearish, having cash in liquid funds is king. You could be a vulture and scoop down and have your choicest pickings, as you have cash. Again, this is easier said than done.
Do remember, in the land of investing the biggest enemy of the investor is himself. Blaming outside factors is the easiest way around to satisfy yourself. At the end of the day, the investor is the Arjuna, it is he who makes final decision.
The writer is founder of WealthWays Private Wealth Management