Synopsis
An investing framework based on logic, rather than emotions, provides stability during manic markets. Diversification is the cornerstone of stock investing safety. However, only a few investors realise that diversification works consistently over the long term. Markets tend to converge to the mean over time.
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Dhirendra Kumar
CEO, Value Research
In theory, every investor knows that the stock market is a fickle beast. In practice, when the markets enter a period of decay, it’s normal for investors, even the seasoned ones, to feel uneasy and stay awake with unanswerable questions: will it keep dropping until it hits zero? How long will this downturn last? Is now a good time to buy into the dip? These questions may not have answers, but there are some tried and tested principles that long-term investors can follow to help ride out periods of volatility. Resist the urge to panic when stock prices are falling sharply.
More often than not, impulsive selling during downturns locks in losses and makes it hard to participate when the recovery eventually takes place. A better strategy is to focus on your long-term goals and avoid making fear-based decisions. Remember that the market corrections and bear markets are normal in an investing cycle. Historically, Indian markets have always recovered to attain new highs, and that too, in a fairly short periods. Times like these are an opportunity to rebalance one’s investment portfolio. Rebalancing essentially means selling assets that have increased significantly and buying those that have fallen. This allows you to buy low and sell high. Rebalancing also returns your portfolio to original target asset allocation, controlling risk. Downturns present a good opportunity to rebalance the stocks at lower prices.
Interestingly, when stock markets are down, many investors’ reactions and panic are directly fed by how well they manage their financial lives outside the markets. To be a good equity investor, ensure you have an emergency fund with enough cash to cover a few months of expenses. Do the obvious things like paying off high-interest debt, defer large discretionary purchases, and explore income diversification, if possible. The people who do these things become better equity investors even though these have nothing to do with equity.
A panicky person will not make good decisions in any aspect of life. In any case, volatility is an integral part of the package. There will always be downturns, corrections, and bear markets mixed with uptrends. However, historically, the overall trajectory of the stock market has been up through wars, crashes, bubbles, and panics. Maintain a long-term mindset and ignore short-term noise. The nature of investors’ errors has changed in the past decade or so.
There is now a lot of noise generated by mainstream and social media. Trends like crypto and profitless digital companies have made it worse. This constant barrage of information, opinions, and hysteria surrounding short-term market moves can lead to poor decision-making driven by FOMO (fear of missing out), YOLO (you only live once), FOBI (fear of being included), and their older counterparts, greed and panic. It’s crucial to tune out the noise, stick to the fundamentals, focus on intrinsic value, and keep your eyes on longterm portfolio goals.
An investing framework based on logic, rather than emotions, provides stability during manic markets. Despite these apparently new phenomena, diversification is the cornerstone of stock investing safety. However, only a few investors realise that diversification works consistently over the long term. Markets tend to converge to the mean over time. Over short periods, almost any principle can collapse. Instead of panicking over price fluctuations in the broader market, focus on finding high-quality companies trading at a discount. Market downturns indiscriminately punish highand low-quality stocks, creating buying opportunities. Our best bet is that, during such times, we avoid panic and actively hunt for opportunities.
In uncertain times, having a prudent strategy focused on the long term is critical. The winners avoid emotional reactions, take advantage of volatility to buy low and stay disciplined. With a level head and sound principles, long-term investors can ride out periods of decline and continue compounding wealth over their investing horizon. ‘Time in the market beats timing the market’ may be an old cliche, but it’s a cliche because it’s true.
(The author is CEO, VALUE RESEARCH)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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