Stick to long-term investment strategy despite current market scenario and short-term volatility

Different types of assets carry different levels of risk and potential for return, they typically don’t respond to market forces in the same way at the same time

Stick to long-term investment strategy despite current market scenario and short-term volatility
An asset allocation strategy with a well-diversified portfolio is the key to managing risk and ensuring low deviation from the expected outcome. Image: Pixabay

By Tanvi Kanchan

The last month turned out to be exceedingly volatile for equity markets around the globe. Raised worries over economic slowdown amidst tightening policy rates, Russia-Ukraine conflict, and high inflation resulted in global and domestic indices to be volatile. The broad based indices witnessed a steep fall with Dow was down by -16.37, S&P by 21.34%, Nikkei by -7.9%, Russell 2000 was down by -24.19% in the current calendar year. Indian Equities too didn’t remain completely unscathed, with nifty being down by 10.5% in the current calendar year.

The government of India laid down measures to help with the rising inflation, it laid down an export ban on wheat, followed by a sharp export duty on steel which dented sentiments, as investors started to speculate more such measures across other sectors too. The RBI in its recent policy meet raised another 50 bps rate hike which also dented sentiments. We witnessed FII continuing being the net sellers by ~USD5.2bn while domestic institutions continued to remain bullish and were the net buyers to the tune of ~USD 6.6bn.

The government of India revised GDP growth estimates to 8.4% and we witnessed CPI inflation down to 7.04% in May’22, meeting consensus, however still above RBI’s estimates. We expect the rate hike scenario to continue with expectations for another 150bps rate hike in the next 18-24 months. 

Looking at the current economic scenario, I believe that the current investment outlook should be strategic as opposed to product driven. One should assess the investment objective and risk associated with the investment vehicle. There has never been such a thing as ‘Right’ time to invest. While investing, it is the tenor or the duration of the invested portfolio that counts as opposed to the timing of the markets. Psychologically, there’s this gravitational pull around the markets, where people tend to sell when the markets are really low and then wait for the right time to invest back in, by which time the markets tend to bounce back and they miss the rally.

The most important factor while investing is sticking to your long term strategy. Looking at historical data, the markets fell by ~-38.4%, from its record high last year during the start of the covid pandemic, now assuming if you had invested even at the peak, the time when the markets were at the highest point, you still would be at ~27.38% abs. returns! This is what I mean by not the timing but the duration of investments.  

As observed in the above table, there are 6 instances where markets fell significantly, and the average of all those falls was -48.7%. However, it is important to note that after 3 years from the fall, the markets recovered better than the previous peak, and the average recovery has been 148.3%.

At a given point of time, the markets would either be up or down, but a good diversified asset allocation strategy not only helps to create an alpha during positive market movement but also provides a cushion so that your portfolio doesn’t fall as much as the markets during a volatile period. 

Asset classes are broadly divided into Equity, Debt, Commodity and Real Estate; then they are further broken down to Stocks, Mutual funds, bonds, gold, etc. Different types of assets carry different levels of risk and potential for return, they typically don’t respond to market forces in the same way at the same time. For instance, investing in stocks directly is considered highly risky as opposed to equity mutual funds. FDs or Debt Mutual funds are usually considered as low risk assets due to low volatility perceived in them. Thus, we need to work on a top-down approach. Define a strong asset allocation, between equity, debt and commodity and then go about selecting the sub categories within them.

An asset allocation strategy with a well-diversified portfolio is the key to managing risk and ensuring low deviation from the expected outcome. Everyone’s risk taking capabilities differ and there are various ways to measure your risk tolerance. Investors must understand the overall risk associated with the asset allocation strategy. When we are investing for the long term, short term volatility will always prevail but at the end of the day the fundamentals matter. 

(Tanvi Kanchan – Head – Corporate Strategy, Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own.)

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