The period after March last year has been disappointing for equity investors in the country. Those who have started investing or those who had increased their allocations in stocks after March 2015 are seeing their portfolio heading south and erosion in value.
Typically, the equity markets move ahead of the fundamentals. And then expectations become our master. More often than not, the fundamentals follow with a lag and if the lag continues, the indices head south. That’s one more reason to have an investment plan and an Investment Policy Statement (IPS) in place before initiating investments. Investment guru Benjamin Graham once said, “Individuals who cannot master their emotions are illsuited to profit from the investment process” .
When the markets were riding high in late 2014 and early 2015, there was euphoria all around and those who had not invested were cursing themselves, for missing the bus. Now the indices are quoting at levels prevalent at pre-Modi election results.
That’s why its important to have the rules in place. Each one of you have unique needs, are wired differently to risk and volatility and have unique customised goals. So why do you want to ape anyone else’s investment process?
As an investor, we need to know ourselves why we are investing? For what purpose we are investing – i.e a goal/milestone to reach. And have a time frame(across the investment periods) and more importantly – the liquidity needs, i.e you will not invest your short term proceeds into long term instruments. For instance, allocate funds with maturity requirements into equity asset class, in excess of five years only, if you fear volatility.
Each of you, based on your risk appetite and goals should have your personal investment plan. Each of you are unique and what is good for your friend or peers need to be good or applicable to you.
Today, volatility is part and parcel of the investing journey. Commonly, we interchange volatility with risk. And this is a misnomer. Volatility means movement in prices. Risk has multiple definitions. Permanent loss of capital can be a basis to define risk.
In the asset allocation framework, which are defined prior to investing, having the basics right is important. So, if you can distinguish between ‘risk’ and ‘volatility’, the investing journey is much smoother. Set small targets and achievable goals. Moreover, setting up incremental goals is another method, to stick to, in the overall investing journey.
Have the asset allocation framework – between debt, equity and other asset class in place. Review and rebalance, based on pre-determined levels. State in the investing rule book, actions which will be warranted at various levels (Sensex/indices) and times (economic – good or bad) of the journey. This will ensure that you are not a ‘slave’ to your emotion. And there is a pre-determined process in play which will guide you.
The basic framework needs to be in place. The markets work on perceptions, many a times. After touching a low of 8,047 in March 2009, in less than 2 months the same indices touched in 14,930 levels in May 2009, a rise over 85%.
Timing the market is the worst mistake. Invest as per your plan and your set rules. If you cannot digest the volatility or a paper loss in excess of 20%, revisit the investment framework.
You should enjoy the investing journey. And if you know which road to take, the journey becomes more predictive. Have a process and your own personal rules for the investing journey. Get the data and reasoning for investments in order. Having a personal investment plan is the key.
The writer is founder and managing partner of BellWether