Investors and spectators often go through an emotional roller-coaster every time the stock market goes up and down. So, what should they do when such phases occur?
It’s not new for sentiments in the equity markets to swing like a pendulum. It’s just that the reasons are different every time. One will, however, see that investors and spectators often go through an emotional roller-coaster every time the Sensex goes up and down. Let’s face it that this volatility is an integral part of the stock markets and it has always been there and will always be there. It is just that the intensity and the velocity of the Sensex movements might have changed based on the depth and the breadth of the capital markets.
So what should investors do when such phases occur?
1. Keep a check on your emotions
Do not let the headlines all around affect your investment strategy. Cut yourself off from the financial information overload and think straight. This is easier said than done and is often the most difficult step to achieve in an investment strategy. Hence it is often important to focus on your financial plan and let that dictate when to buy, when to sell and when to make changes to your portfolio & asset allocation.
2. Review your asset allocation and portfolio
How has your portfolio done as compared to investment objectives that you have set? If your equity holdings have fallen by 10% or more, look at adding to your existing positions (only in case of sound businesses (stocks) and well-managed diversified equity funds). Take a staggered approach to accumulate high-quality blue-chip stocks and your existing holdings in mutual funds.
If you feel that you cannot stomach the high equity exposure and are continuously sweating out emotionally, then you should lighten your equity exposure (to a more comfortable level) starting with investments where you have made money and after considering the tax impact. If there are some winners and some major losers, then you can stick to the winners and chuck out the losers. I am not suggesting that you chuck out every losing stock or fund, as there are times when even fundamentally good stocks and mutual funds take a beating. Their future potential is far more important than the short-term temporary blips and hence it is important to review all investments individually.
3. Don’t wait to invest right at the bottom and more importantly Act
Though it requires a lot of nerve to invest when the markets are going down and when everyone on TV suddenly turns pessimistic, it is important to act and buy investments that you have always felt were more expensive. In short, keep your shopping list ready and keep making purchases steadily. Don’t wait to perfectly buy at the bottom as one just needs to be plain lucky to get in at the perfect bottom.
The most important thing is to keep a tight eye on your asset allocation and make changes when it significantly deviates from the initial settings that you have made and yes give due respect to risk and learn to make it work for you. As a long-term investor, make market negative sentiment your friend and don’t run away from it.
(By Amar Pandit, CFA and Founder, Happyness Factory)