Markets do fall but do not stay there forever; rather, after every such fall, they scale greater heights
The year has been an interesting year for investors, especially equity investors. They were in for a shock when the pandemic began and they saw the value of their portfolio deplete by as much as 40 per cent, before the market recovered and reached its all-time high level. While those who have been in the investing game for a long time have gone through major corrections in the past, new and young investors may have seen this kind of sudden erosion of their wealth for the first time.
In an interview with Outlook Money, Prashant Joshi, Co-Founder and Partner (Financial Research and Advisory Services), Fintrust Advisors, shares what lessons one must take from all this. Edited excerpts.
When an investor sees such a setback in his portfolio, what can they do to stay on course?
For first-time investors who entered before Feb'20, the market mayhem earlier this year may have been financially and emotionally painful. They not only lost money but some may have even lost faith in the market. It is crucial to look back at the journey of the Indian markets especially the peaks and troughs to visualize beyond what is apparent and endure the pain, especially for those who entered at the peak and caught at the wrong foot. After every significant correction, the market has posted handsome returns and moved to a new orbit. The takeaway: "Markets do fall but do not stay there forever; rather, after every such fall, they scale greater heights." All that is required is patience to stay long term in the markets, tolerance to face negative periods, and recalibration of the portfolio.
What kind of emotional and financial impact such an event can have on their lives? Is there a need to change their investment strategy in such times?
Severe, quick, and sharp market corrections are very painful to experience and have a multi-dimensional emotional and financial impact that varies from person to person; with many turning away from the equity markets. However, one should remember that staying on course and recalibrating instead of retreating is a better investment strategy. Instead of fear or grief, a rational and prudent financial temperament helps to navigate and stay on course. Taking corrective actions is always a good strategy. Successful investors accept this and recalibrate their portfolios not just to minimize losses but to take advantage of the next upcycle. Revisit the portfolio to understand what you own, why you own the timeline, and the reason for ownership in the context of changing economic cycles to be able to make a sound decision to recalibrate the portfolio rather than getting swayed by the dominant-negative market sentiments. Market Pundits will always give hope; however, hope is not a strategy, and an investor should have a logical reason to hold on to a losing position. Be cautious not to catch the falling knife. Be invested in the companies which have exhibited faster adjustment to emerging changes, financial, operational, and strategic restructuring in the past.
What is your advice to those investors who continue their investment journey into 2021 despite the emotional rollercoaster that was 2020?
We have seen 2000, 2008, 2013 and 2020 fall. On one side of the spectrum, we have seen investors exiting forever. On the other side, we have also seen families who have successfully compounded over the same time horizon and created serious wealth. Some rules, which when followed, definitively helps to manage, survive the downturns and its repercussion are:
Monitor portfolio continuously.
Do not leverage and invest in markets.
Accept risk cannot be avoided but managed. One of the most effective ways to manage risk is to rebalance the portfolio be it at the asset level or an investment level.
Be flexible—to a point—and remain rational when making decisions to change your plan of action.
Remember also to re-evaluate strategy from time to time
Always assume that the invested money is cash in hand. Ask the question: if the investments are to be done today afresh, will the stocks, sectors, and managers you hold, get an allocation. If the answer was no, then it merits a portfolio course correction.