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If your portfolio catches cold everytime the stock market sneezes it is a signal that all is not well with it. May be some of its constituents have moved dangerously close to
the faultlines of the market floor. May be your asset allocation got skewed in the wrong direction. Or perhaps you got over exposed to the market due to temporary possession of your saner senses by moth mentality. For whatever reasons or on whosoever's advice you landed yourself in this situation is immaterial.
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What is more important at this stage is how to get out of this situation - by correcting or by quitting , and how to avoid its repetition in future. The only thing you must desist from doing is to blame the market. It is the very nature of the market to behave the way it is behaving. It is impregnated with the same element of uncertainty as life itself is. Understand and accept this reality about the market because it is going to impact you throughout your life directly or indirectly in one way or the other.
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unless you feel that things have become downright nasty. Disconnecting in haste may causes further damage or bruise your interests. However, if the situation has become so critical that it is causing loss of sleep, shut your shop and bolt without stopping or pausing to look back. And if you are in the market courtesy some mutual fund, exercise the switich option and move your investments into the more stable debt or money market instruments.
The only practical way to immunize one's portfolio against market shocks is to maintain or stick to one's original asset allocation. Book profits or make adjustment in tune with the times and market diktats. Do not deviate or move too far from the plan allocation. Your general stance should be goal centric and not market centric. There will be rumblings whenever something untoward happens on the floor, but the edifice of your investment will not swing sideways.
For the uninformed and the unplanned the advice is not to let your greed glands get the better of you and as such adopt a conservative approach in your dealings in the stock market to avoid being a reluctant witness to your hard-earned money going down the rat hole with little chance of retrieval.
The answer to the poser how to invest in volatile times is very simple and straightforward. You will invest in volatile times in the same way as you would in more stable and nonvltile times. And what is that way? In this article we have endeavoured to explain the methodology and the appraoch to scientific investing. When you adopt a scientific approach to saving and investing, volatility becomes irrelavent. All times are investment times. And that is the final answer. A scientific approach is one which can be adopted by anyone at any time and under all conditions. The boiling point of water will be 100 degrees celcius no matter who boils and where he/she boils it: "A or "B"; in the Arctic or in the Tropics. It is true that to reach the boiling point, it would need more time in the former location than in the latter. Likewise the results or the outcome of scientific saving and investment process might take different time under different economic conditions or situations but nevertheless they will be the same.
The solution suggested is too simplistic to be convincing. It also sounds a bit farcical but nevertheless it is highly practical and time-tested approach to investing. The approach comprises preparation of a financial plan which is built on four pillars (principals) of successful financial planning viz.,
Long time investment perspective
Judicious and well informed asset allocation
Regular investing; and
Adherence to goals
An investment plan prepared and implemented with little regard to the weight bearing beams and pillars is bound to crumble under its own weight and lead to all sorts of complications and confusions. Let us discuss in detail these beams and pillars which help your financial plan withstand the fury of economic and market upheavals and remain steadfast under all conditions.
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A retail investor's financial plans are not made in isolation. They form part or should form part of a well-integrated saving and investment strategy designed to help him/her meet life's financial obligations and retire from his worklife in peace. The first cardinal feature of a good financial plan is, of course, the time horizon. Since starting early on the journey to wealth creation and preservation is a precondition for projected success, the time perspective of necessity becomes an integral part of the plan. The corollary is to remain invested over a long period, say, of 15-20 or 30 years. Time is a great leveller.
As undulating land looks smooth from a distance so does the long period investing rides the tops and troughs of the market making its total course look one smooth stretch. The surface volatitility of the sea does not look permeating and impacting, the calm and placid waters underlying the waves and ripples in the distant horizon where the sky meets the sea.
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The scond most important feature of a financial plan designed to last thirty plus odd years is the application of age old wisdom of never putting all the eggs in one basket. The expression is as relevant today as it was on the day it was coined . We must place our savings in different asset classes - say, stocks, bonds, money market instruments, cash, commodities, real estate, gold or art. There is every possibility that returns from one asset class at any given time may not be adequate to offset even the inflation effect, while the other asset may have become the darling of the day and yield income enough to compensate for the low return from the other.
Such is the proven efficacy of good asset allocation that it is difficult to over emphasize it. Brinson Singer & Beebower in the year 1991 in their famous study "Long term determinants of Portfolio Performance " concluded that more than 90 per cent of success can be attributed to proper asset allocation, 5 per cent market timing and 5 per cent to scheme slection. A reasonably good and potentially sucessful asset allocation exercise requires indepth knowledge of wide range of asset cleasses and information with regard to their historic profitibily. Looking at its importance as determinant of high returns it would be worthwhile to hire the services
of professionals for this purpose. It is amusing to know that probability of perfect timing of the
market is close to zero and that stock selection is challanging and time consuming task even for the professionals and as such beyond the scope of average retail investor.
If your financial operation are not of the size as to permit of professional guidance, you may rely on the more simple methodology. It is known as three pillar approach; Park your funds in cash, debt (regular/assured income instruments) and equity for wealth creation - growth portfolio) in the ratio of 10-60-30 if you are 30 years, and 10-70-20 if your are 40 years old. The thumbrule for exposure to equity is 60 minus your age. Say if you are 50 years of age, you invest 10 per cent ( 60 minus your age i.e 50) in equities. An experienced investment adviser can help you allocate right amount of money to different assets in equity and debt. These percentages are not rigid and may be tempered to factor in the logevity aspect.
People often tend to divert more funds into equity when the going is very good. Their action is not based on any indepth study of the stocks, the underlying businesses or the macro-economic factors impacting and driving the market. They are guided by their hunches and gut feeling. This makes the entire asset allocation exercise go awry and often skewed in the wrond direction
Investing fixed amount of money on regular basis constitutes the third most important ingredient of the entire wealth creation and preservation process. Stormy or calm, volatile or stable every time is the investment time. For people who are into raising a family there just could not be a greater virtue than saving or putting aside a part of their income every month and investing the same into some kind of income yielding financial instrument on a regular basis. Systematic Investment Plans of mutual funds, as the process is commonly known, are a boon for the small investors.
They come very handy to implement saving and investment plans. Individuals - males, females traders, professionals and whole lot of other cateogories of people- are lapping up the plan to get into saving and investment mode. Mutual fund industry deserve accolades for introducing SIPs. Through the SIP route, you get invested at all levels, the average cost of an asset acquisition is lower than what it would have been otherwise. In addition, SIP obviates the need to time the market which in any case is an impossibility.
Volatility loses its sting when investors stick to their long term financial goals. Being goal centric is, therefore, central to success of a financial plan. Since making a fast buck at the bourses was not a part of your financial plan and goals, you got into the process inadvertantly - herd mentality or the feeling I too can do it. Adopting a goal centric approach will keep you from getting sucked into or succumb to market temptation and hence from the stanglehold of stocks that do not figure in your plan while helping remain within the diversification limits set out in the plan.
Some times first things come last . We have outlined strategies to achieve our financial goals without having clearly described and determined what these goals are. How they have been priortized and how the present and projected valuations worked out. And that is exaxctly what has happened in the foregoing discussion on how to invest in volatile ( and non volatile ) times.
A scientific process of wealth creation and preservation must of necessity begin with very clear identification, and definition of our financial goals. This step is extremely important. Identification of goals lends clarity, direction and motivation to the entire process. by delineating the gols we psychologically bind ourselves to the task of achieving them. It is a matter of pity that for some unexplained reasons majority of people avoid telling themselves as to what they would like to be financially.
Perhaps making a sincere and upfront statement of their present financial status or spending patterns gives rise to a feeling of guilt. Or is it that such an act automatically leads to the urge to compare ourselves with others the outcome of which can be hurtful. This attitude has been the cause of many a financial failures and mayhems. Without the foundation of goals determination, we cannot move forward successfully and confidently on the road to financial freedom.
Once the goals have been clearly stated, the next logical step is how to achieve these goals. Most of us may not be able to do it entirely on our own. The financial world like our lifestyle has also become very complex. The range and variety of financial products, the tax laws and levies, the inflation aspect, and future economic picture, are things beyond the comprehension of an average retail investor. Fortunately, however, help is always at hand in this regard. Many leading financial product merchandisers offer expert advice free of charge or at very nominal fee. They, in turn, get paid by way of commissions by the product manufacturers.
You will need advice on where to put your money in, when to put it and how much to put in a partcular class of asset. You will also need expert guidance on tax optimization. The process, however, is not a one time exercise. You will need someone in the financial advisory servcie to keep you abreast of the health of your investments on continuous basis. Please bear in mind hat you are not an inorganic entity and also scientific approach does not mean a rigid appraoch especially when it comes to short term or tactical investment or asset allocation. The core of course will have to be treated as being more sacroscent unless circusmstances undergo radical change calling for recasting of the entire plan. Bending against a storm is not yielding but a tactical move to negate the impact of the strong and none too favourable winds that often sweep the economic and financial world.
Let us acccept the basic premise of economics that In the long run, we will all have to live in a style or support a standard of living which the society would permit and the economy would afford. In free economies, market (the battleground and the point of confluence of demand and supply) is the mechanism which determines how productively a nation's capital and other resources are being deployed, how much income is being generated and how the various factors of production have to be rewarded. State subsidized rates of interest will have no plae in the market driven economies of the futre. Sooner we learn to make do with what the market would bear the better it would for us
