Investors must react with caution in volatile equity Markets

Not long ago, investors were looking at the stock market as money making or earning machine for them. Every one associated with it – investors, fund managers, analysts and commentators felt equity had finally become an integral part of portfolio building for all segments of investors. It seemed the equity cult was here to stay. How things have changed in recent months. One hardly hears anything positive about the stock market these days. International and domestic factors such as the sub prime issue, rising inflation, oil prices and the fear of an economic slow down have cast their shadow on the markets and on the psyche of investors.

As it happens during uncertain periods, investors have started questioning the ability of equity to build wealth over time. The main reason for this disenchantment is that the market downturn in the last six to nine months. Of course the last few months have been tough for equity investors, but it’s somewhat distribution how perceptions about equities have changed. Investors should remember that, just as the stock market does not always go up it will not always go down. They must realize that, by deciding to sell in a panic in a falling market, they will turn paper losses into real losses. In a declining market such as we have seen in recent months, many investors first instinct is to flee the stock market and move money to safer options like debt products. This happens because they don’t have clear time horizon to be in the market. For a serious long term investor, the situation is different. Investor, too, is affected by volatile markets, but he is mentally prepared to handle downturns, and has time on his side.

It is well known that stock markets can be volatiles in the short term. Whatever the frequency, intensity and length of a decline, the only strategy to successfully handle it is to stick to your quality investments. Falling stock prices don’t always mean the companies concerned are not dong well. Factors unrelated to company performance could impact its stock price. Historically, it has been proven that a quality portfolio always recovers lost ground in other words the patience of long term serious investors is always rewarded.

So view market declines in perspective. Short term fluctuations do not take away the ability of equity as an asset class to beat inflation in the long run. For all those intend to build capital over time, equity remains the best bet.

As for realigning your portfolio when markets turn volatile, remember that short term trends are not cause to making changes in asset allocation that is planned for long tem objectives. By changing asset allocation every now and then, you would be laying a guessing game that could prove very costly.

Debt oriented investments, too, can be affected by various factors – for example, changes in interest rates. So we may see a difference in returns offered by debt-oriented investments after say six months. This is a good time to weed out non-performers in ones equity portfolio and move money to quality stocks or funds.

Equity fund investors who continue to invest regularly during lows will benefit even more when the market rebounds. The key to success in investing is a disciplined approach. A haphazard approach may work only when the market is rising as whole. But consistent success comes from a strategic and deliberate approach. Base your investment decisions on long and short term objectives. Spur-of-the moment investment decisions based on current trends can result in a failure to achieve one’s goal. Ignore short term declines in the portfolio value. Moving money from equity funds in response to a short term loss could lead missing out on gains when the market rebounds.

Develop a set of rules to guide investment decisions and break them only with very good reason. Test these rules over time and change them only when circumstances personal and external change. The difference between success and failure may be determined by actions taken during the periods of uncertainty.