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How to tackle volatile markets? A few tips
Amar Pandit | February 18, 2008
"Neither a man nor a crowd nor a nation can be trusted to act humanely or think sanely under the influence of a great fear...To conquer fear is the beginning of wisdom". - Bertrand Russell, British mathematician and philosopher.
The above is applicable to all parts of life, especially when you are an investor in the equity markets. The last few weeks have amply demonstrated how investors, whether institutional, retail and even the veteran reacted to the sharp fall in the stock markets.
The same people were bullish, not so long ago, turned bearish at the advent of a technical correction. And that too, after expectations for more than a while that the markets needed to correct.
Just a few weeks ago, people from all over the country were going berserk in their attempts to open a demat account because they wanted to participate in the Reliance Power IPO.
Two days post-listing, there are few takers for the scrip. Investors, who were hoping for huge listing gains are now left licking their wounds. In other words, greed has now been replaced by fear.
A situation like this has an effect where the analytical skills are put aside and crucial financial decisions are made under the influence of fear. For instance, any risk on one segment leads to a perception that there are risks everywhere.
Now that the global economies are not doing so well, analysts, experts and investors are juxtaposing the performance of those economies on India and predicting slowdown in earnings, valuations, political risks and inflation.
Just few months ago, when US markets were suffering and we were going great guns, the same investors and experts were touting theories of decoupling from the US.
So, the big question is that how should you look at fear? Yes, everyone knows that many investors have suffered in the recent crash, but should you refrain from the market? If the answer is no, then it is almost like saying that since my neighbour had an accident, I will stop driving the car.
Before you come to any conclusion, delve a bit deeper into the nature of investments that your neighbour was making. For all you know, your neighbour was overleveraged, too greedy, had no respect for asset allocation and his entire portfolio was in mid-cap stocks.
There are many who treat market investment as an act of war. They sit in front of television, watch market news and calculate their gains and losses by the minute. Certainly, this is no way to look at investments.
What is however within your control is your ability to control your fear as well as greed. Here are a few tips you can use
Set certain rules in place before you start investing. Include factors such as managing in a situation where a slip of 35 per cent happens. Also, if you have planned your finances well, there will be no need to pull out of equity investments in such situations. Define clearly what you will not do when the markets go down and how will you cope up with Fear. Of course, thinking and actually going through a 35 per cent drop are two different things.
Ask yourself something very important. "Does a drop in prices mean doom?" It is because if you were confident of buying at higher levels, a fall should be seen as opportunity rather than a loss. Of course, if you are into shady companies for quick gains, there is a clear case of misjudgement. But good stocks will always remain good stocks. And whenever the markets bounce back, these are the first ones who will enjoy the spurt.
Understand your Investor Feeling Quotient. Do you feel scared to death when prices go down? How do you feel when prices go up continuously? Crunch the numbers and see how you would have performed or under performed when you bought during times of excess optimism or great pessimism. Your responses will point you in the right direction.
Take a contrarian view. When everyone is selling, it offers opportunities to buy as well. Your financial position is different from others. Thus, decision-making should also be based on it, and not on someone else's portfolio performance.
There are many who have come out winners from the previous slumps as well. To join the gang you need good stocks and patience. Simple, isn't it?
The writer is director, My Financial Advisor