1. Stock markets: Never time markets based on events

Stock markets: Never time markets based on events

Volatility is a way of life and sooner you accept it, the smoother could be your long-term investment journey.

By: | Published: April 19, 2017 4:33 AM
Stock markets: Never time markets based on events.

For equity investors, it is important not to react to every event in a kneejerk manner. As an investor you should control what you can and not try to forecast what could happen in certain scenarios. The year 2016-17 was an event-filled year. You had the Brexit, the US elections, surgical strike by India, demonetisation, rate hike by US Federal Reserve, elections in five states, etc. Despite all such events, the BSE Sensex delivered around 17% return.
Never time markets based on events.

Why do investors time their investment decisions based on the outcome of the events, which is a factor not controllable at their end?

With information easily available, it is easier to analyse the stocks and data and take a wise investment decision. One must look at investments based on various time horizons and liquidity needs. Typically, over a period of five years, the outcomes of the events are evened out and investors cross one economic cycle. In equity, one must stay invested for a long time so that volatity is taken care of in the period.

For instance, in 2016-17 the Brexit event was not predicted to happen the way it unfolded. But the moment it happened, the negative outlook outscored anything else. As it happened, analysts had forecast that the European economy would witness slow growth and job losses would rise. This, in turn, analysts said, would all lead to lower economic growth and lower returns from equities. Well, what has happened is that the equity indices moved the exact opposite way.

Similarly, after the government’s demonetisation move last year, analysts had forecast a slowdown in the economy and consumer demand and reduction in investment. The noise was all pointing to one direction, the equity markets would see a downward trajectory. However, three and half months after demonetisation, the Sensex has moved up by 10% and other high-frequency indicators are also showing an uptick. With GST likely to see the light soon, markets have reacted positively.

Method and process in investing

As an investor you are going to encounter more such future events and investing based on events is not the approach to reach your financial goals. There has to be a method and process in investing. Never decide on investments based on events and short-term market movements. In fact, volatility is a way of life and sooner you accept it, the smoother could be your long-term investment journey.

Never mix liquidity needs with investment decisions. When it comes to investing, look at tips which are backed fundamentally for short-term gains. However, be cautious about companies which are highly leveraged and do not buy stocks because of pressure from your friends or relatives. An investor must improve his emotional quotient when investing on stocks and take the final investment call after analysing every aspect of the stock.

In the investing journey, you should not be a slave to events. You need to be on top of the events and this can happen only if you have your personal checklist and investment policy statement put in place. Do not ignore the framework as investing is not a 100 metre dash. It is a marathon where the peaks and the troughs have to be endured to win a long-run race.

The writer is managing partner of BellWether Advisors LLP.

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