When it comes to investments, recessions can be termed as a short-term blip. Young people have the capacity to weather storms due to their age factor.
Every few years the word “recession” pops up in headlines. It is the period when fear takes control of greed. People make a mad rush to salvage their capital in whatever way they can. There is no way of predicting when the next house of cards will fall. Yet, there is a silver lining. Every recession has enabled the markets to bounce back harder and scale new highs.
When it comes to investments, recessions can be termed as a short-term blip. Young people have the capacity to weather storms due to their age factor. The next financial crisis may be around the corner, but it is not possible to time the market. The investor fraternity panics when long-term yield curve dips below short-term yield. This means that people are unwilling to take long-term bets. The people in the age bracket of 20-30 years have ample time for their investments to bounce back. It might appear cynical, but for young investors, a recession is a piece of good news.
A consistent saving approach allows young investors to cost average their investments. The falling stock market is like a sea of opportunities, a blessing in disguise. Every asset class has a chain reaction, but the long-term impact is limited. The drop in markets is like “sale.” Investing in a falling market makes the power of compounding even more powerful.
Young people should be more concerned with their goals. Once the financial plan is in place, stick to it, no matter what the market condition is. Even most successful investors couldn’t time the markets. Objective-based investing works wonders. It helps the young investor to stay on course and ignore market noise. Remember, not all potential crisis turns into an actual crisis.
Even if the world is screaming recession or markets crash by 50%, its impact after 30 years will be non-existent. If one is investing small amounts over a period of time, there is no reason to worry over the short-term crisis. Remember, during the Second World War, the US stock market made bottom that has never been broken. A classic testimony to the fact that crisis is the best time to invest.
As the person grows older, time works against him. Young people enjoy the advantage because time works for them. They can easily recover from the patch of a few bad years. The goal of investing is to beat inflation while generating decent returns. With proper planning, it is possible to mitigate risk to a certain extent. In a bull market, an overvalued stock can appear cheap. The same applies to bear markets. In a falling market, an undervalued stock appears pricey. An investor can always re-balance his investments. If one is scared of volatility, one can invest in a risk-averse, interest-bearing bond or debt funds.
The key to success is to think long term. In times of volatility, it is better to take a break from the news world. Markets have braced several recessions, and each time they have emerged stronger. Young investors should adopt a similar mindset. Instead of getting carried away by news, they should focus on their goals.
(By Abhinav Angirish, Founder, Investonline.in)
Disclaimer: This is the personal view of the author.