However choppy the markets, investors need to remain calm and stick to their long-term investing plans
Empirical evidence states that the average time taken for stocks to bottom out is just 22 days whereas the market recovers all losses in an average of 47 days. With tensions escalating in the Middle East, outbreak of Coronavirus in China, change in leadership in Taiwan, etc., investors need to remain calm and stick to their long-term investing plan. Let us see how to do this in detail.
Learn from the past
Since World War II, the average market loss after terrorist or military attack has been just 5% on the major global index. The biggest hit which came from the Pearl Harbour attack was in 1941, when the index lost around 20% and it took 307 days to recover. Iraq’s invasion on Kuwait in 1990 triggered around 17% drop and it took 189 days to recoup. The recent coronavirus will lead to significant reduction in China’s GDP growth and nine out of the top 10 countries in Asia including India are vulnerable to the virus. In such a geo-political and epidemic scenario, investors should avoid the following few mistakes to protect their portfolios.
Do not lose faith in the market
Most retail investors who are new to trading lose faith in the market. If we look back at a similar situation like that of the Kargil war, markets eventually bounced back with more than 13% gains between the start to the end of the war. India came out of the global financial crisis in 2008 successfully but retail investors lost a considerable amount of money which shattered their confidence in the market. So, an investor should not cash out of the stock market on worries about a possible fall in share prices. Though prices may fall in the short term, they may also recover in due course as evident from the above.
Diversification is the key
Even though the equity market promises to offer better returns compared with any other asset class, as the saying goes, do not put all your eggs in one basket. To safeguard from potential events as discussed above, diversify your portfolio. Your portfolio should include equity, bonds, real estate, gold, etc. Again, within each asset class, you should have multiple assets according to your risk appetite.
Continue with your SIPs
Often, investors stop contributing towards their long-term systematic investment plan when they see a reduction in the indices. We buy electronics, clothes, etc., during offers and discounts but we tend to do the reverse when it comes to investments. Technically, investors should buy more of mutual fund units when the prices have slashed. Earn those extra units at lower price (NAV) and reap the gains when the market is at the peak.
So, instead of worrying about the global tensions, investors should make an attempt to practise the above advice to accumulate more wealth.
The writer is a professor of finance & accounting, IIM Tiruchirappalli