Investors can handle volatile markets or stock market downturn by doing certain things and following the fundamentals of investing.
A series of negative news that came in last week has shattered investor confidence and the euphoria that had built up around the Indian stock markets. Although the market has soared again, but no one can guarantee that it will always remain in the current state. At this point, therefore, we need to stop worrying too much and ask some fundamental questions to ourselves. It’s perfectly fine to be cautious and sometimes being all in cash with no exposure is also a good investment strategy. Therefore, first let’s analyze the factors that have affected the investor confidence:
Fear around a Nuclear War in the Korean Peninsula: Things have gotten out of hand to some extent with both the North Korean and the US leadership taking the rhetoric to the next level. However, “it is our opinion that in the current civilized word, a nuclear war is not a possibility anymore. A localized armed conflict yes, but a full-blown nuclear war is highly improbable since the collateral damage is enormous and no party can afford to take that risk,” says Rahul Agarwal, Director, Wealth Discovery.
Rise in the Crude Oil Prices: The current rise in crude oil prices is again a short-term blip with some geopolitical reasons and inclement weather in North America has led to the current spike. When it comes to supply and demand, nothing has fundamentally changed. We are seeing a period of global oil glut with a lot of inventory waiting to go online which would again bring the prices down to a more sustainable level.
Possibility of Another Rate Hike in the US in December: It is unlikely that the US Fed will opt for another rate hike this year, after a fifth weak monthly reading of consumer inflation. It is true that when the US raises interest rates, the Indian rupee comes under pressure and hot money leaves the emerging markets to safer shores. However, it is also true in the Indian context that the DIIs are providing ample cushion for any FII outflows, a recent study shows that Rs 5000 Cr every month is pouring into the equity markets through the mutual fund route. We believe that even if interest rates are higher or going to be higher in the US, the Indian markets would be performing on the inherent strength of the Indian economy in the long term.
Decline in the GDP numbers, Demonetization and GST Implementation: We believe that one swallow does not make a summer. Yes, the GDP numbers were not up to the mark. However, we have to ask ourselves: Do we think that on the policy front whatever structural reforms have taken place are good in the long term? Would GST implementation widen the tax base? Would it mainline unorganized sectors and lead to overall transparency and ease of tax collection? “Did demonetization lead to a lot of black money coming into the system? Did it enforce a better sense of compliance in the citizens? Our answers to all these questions are a bold YES. Therefore, we believe that the impact of policy reforms is a net positive for the Indian economy. Yes, growth has been hampered and there is some dismay regarding GST, but we believe in the next two quarters things will fall in place and the upward growth momentum will sustain and re-establish itself,” says Agarwal.
After shedding some light on the current news cycle and the negativity built around it, let’s talk about how to navigate a volatile market. A famous quote from a legendary investor is apt in this current scenario, “Be fearful when the markets are greedy and be greedy when the markets are fearful.” In the Indian context, the current correction seems healthy, it provides an opportunity for the investors who had missed the bus previously to re-enter with a long-term perspective. Coming back to how to handle volatile markets or stock market downturn, if investors do certain things, they will find themselves in a better situation and remain profitable.
Here they go:
1. Keep Your Fears in Check and Avoid Market Timing:
There is an old saying on Wall Street: “The Dow climbs a wall of worry.” This in simple terms means that the Dow is continuing on with its upward trajectory discounting every negative short term news that comes in because of the inherent strength in the US economy. The same is applicable to the Indian context. Over time the benchmark index (Sensex/Nifty) has continued to rise, despite economic woes, terrorism and countless other calamities. Investors should try to always separate their emotions from the investment decision-making process. What seems like a massive global catastrophe one day may be remembered as nothing more than a blip on the radar screen a few years down the road.
“Always stay invested for a long term, any you will realize that your investment will give you a positive inflation beating return. Investors need to learn to ignore volatility – a part and parcel of equity investing. Also, if your investment horizon is longer term and you have made sound investments in a diversified portfolio, just do nothing. Don’t exit the markets now, thinking you will get back in time for the next rally. It has been proven time and again that no one can time the markets to perfection consistently, you can never sell at the top and buy at the bottom and that’s where rupee cost averaging comes in which is explained in the following point,” advises Agarwal.
2. Average Down Cost:
The most important thing to keep in mind during an economic slowdown is that it’s normal for the stock market to have negative years – it is all part of the business cycle. If you are a long-term investor, one option is to take advantage of cost averaging. By purchasing shares regardless of price, you end up buying shares at a low price when the market is down. Over the long run, your cost will “average down”, leaving you with a better overall entry price for your shares. For example, at the current levels since the Nifty has already corrected somewhat, it would be advisable to invest 20% of your current liquidity into quality stocks and if the market goes down some more, use it as an opportunity to average down. As we have already said, you can never buy stocks at their bottom, however with rupee cost averaging you can be close to the bottom.
Having a percentage of your portfolio spread among stocks, bonds, cash and alternative assets is the core of diversification. How you slice up your portfolio depends on your risk tolerance, time horizon, goals, etc. Every investor’s situation is different. A proper asset allocation strategy will allow you to avoid the potentially negative effects resulting from placing all your eggs in one basket. Always have some cash position with you that will help you to invest in stocks at a market crisis time that will give you an optimum return. For instance, this is the right time to evaluate your portfolio and analyze it and if there is over exposure to a particular sector or space, it would be advisable to rectify it even at the cost of booking some losses.
4. Look For Value Stock and Look out for opportunities:
A market correction is a fitting time to go out shopping-shopping for good quality equity investments that is. Do not stress too much if your investments have gone down in the short term. When markets are volatile, it’s the right time to harness that excess volatility to your advantage. When the markets are volatile, even the most fundamentally strong stocks start trading at discount because of Bandwagon effect.
“Our goal should be to find them and invest in them. If you are investing towards long-term goals and have surplus funds that are not needed for the next 5-7 years, dips in the market are a good time to put that money to work. Learning from the experiences of legendary investors such as Warren Buffett we should try to do what he does with his money. He often builds up his position in some of his favorite stocks during less-than-cheery times in the market because he knows that the market’s nature is to punish even good companies by more than they deserve,” informs Agarwal.
5. Rebalance Portfolio, Review Stock’s Fundamental:
It is a good practice to always review your portfolio’s asset allocation at least once a year. If it hasn’t been done in a long time, market corrections are a good time to get to it. It is good for your financial health to rebalance when an asset class generates extraordinary returns or makes extraordinary losses. In simple words, rebalancing a portfolio is correcting the deviations in the original allocation.
For example, “initially you invested 60% in equity, 30% in debt, and 10% in gold. Assuming after a year, equity became 75% of the portfolio, and gold accounted for 15%. You will then need to reduce the exposure to equity, and gold to achieve the initial asset mix. This helps safeguard investments from a bad market phase not only by booking gains, but also by reducing the exposure to risky assets. Also, it is also advisable at these times to review the performance of the business of the stock you are invested in. If something fundamentally has changed in a stock that you are invested in, it is better to exit and book your losses,” says Agarwal.
To summarize, for a longer-term investor, stock market corrections are a good opportunity to accumulate good stocks. Indian economy is going through structural changes, which are good for the country and its economic well being. For long-term investors, the recent correction should not be a reason to be overly concerned and panic is the last thing they should resort to because if they have invested in quality stocks they are here to stay and provide good returns to their investors.