The turmoil in the global financial market is having a major impact on the valuation of investor’s portfolios as well as on their psyche. No wonder the investor’s confidence is at its lowest and many are deeply concerned about their financial future. The slow moving market crash that one is seeing for sometime now has kicked into high speed. We are in the midst of a massive worldwide panic that has led to forced selling and liquidations, and it appears that there is more pain ahead.
Times like these can be an acid test for investors, especially those who have invested in equities either directly or through mutual funds. Often, investors rue their inaction for not selling at the peak of the market and when they are subsequently faced with the downturns. While a significant drop in the value of the portfolio can shake even the most seasoned investor, the issue remains whether it is possible to predict the market peaks and the falls in the short term. With the benefit of hind sight, all of us can claim to be wise and pledge to do things differently the next time around.
The fact, however, is that for most of us, investing in equity is the easiest decision to make when the markets are on their way up. Not many care for the stock prices or the NAV levels of the funds and expect them to rise even higher. But when the market starts falling, the anxiety and the fear takes over and invariably we pull out all stops on our equity investments. Many investors end up taking irrational decisions and some decisions can cost them dearly.
Let us understand this by a way of an example. If you invested Rs1lakh in an equity fund and over the next one year the fund made a gain of 60%. Over a year, you would make a profit of Rs 60,000 and your holdings in the fund would amount to Rs1.6lakh. Then, assume that the plunging stock market makes the fund value fall by 50% over the next six months. Needless to say, you will be faced with a completely different scenario.
Against a profit of 60%, you now have a loss of 20% and the current value of your holdings in the fund would be down to Rs80,000. The noticeable factor here is that even though in percentage terms your gain was bigger than your loss, it still puts you below from where you started.
The most challenging part is that to get back to the valuations prior to the fall of Rs1.6lakh, you would have to make a gain of 100%. Remember, the more you lose, the harder it gets to recover the losses. By succumbing to the panic around and moving your money to safer options like debt instruments, you would either forfeit your chances of recovering the losses or delay the recovery process.
Equity investments at lower levels can make the task easier and achievable. Thus, as a long term investor, you would be better off by continuing your investments in equities. If you have been investing through investment plan (SIP), you need to continue this process going forward. Remember that you chose to invest through a SIP as you wanted to build the capital and benefit from rupee cost averaging while doing so.
After investing at higher NAVs during the rising market, this is your chance to bring your average cost down and perhaps be amongst the first ones to benefit from the upward trend in the market-as and when it happens.
Those of you who are wondering what is to be done next or are rethinking on your investments in equities, hold your thoughts for a moment and revisit your long-term investment objectives before taking any action.
If you began investing in equities without defining your risk profile, it would be prudent to do so now. It is essential to address the risk tolerance from two perspectives: financial risk tolerance and emotional risk tolerance.
In the short term, risk can be defined as volatility-how much your investments can rise or fall during a certain period. Over the long term, risk can be defined as the potential to lose money or inability to achieve investment goals. It is important to understand that your time horizon generally decides your ability to hold on to fallen investments.