The S&P BSE Sensex is moving like a pendulum between 25,000 to 27,500 levels, having come off its peak level of 30,000 that it reached on 4th March, 2015. It reflects the constantly changing economic environment and the conflicting views of investors. It therefore becomes a challenge to take a firm view on a variety of inputs including interest rates in the US, the impact of the monsoons, the state of reforms in India, and the nervousness on near term earnings.
In such markets most of us go through many behavioural swings and tend to generally jump from one strategy to the other.
A long period of such oscillation tends to bring some amount of boredom and boredom in investments is dangerous! It can result in poor quality decisions that have serious implications on wealth creation and achievement of financial goals. Some of the consequences of the oscillation
|A new investor, tempted to invest at the peak, as everyone seemed to be making money when the markets were running up, is now in dire straits. He had no clue why he invested, barring the temptation to make quick money. Now he is worried sick and plans to sell out the stock or redeem the mutual fund.
|A new investor who began right by opting for a long term SIP, is now worried with the spate of negative news that he reads all around. Unfortunately, many times the bad news hides the good news. Will he stop his SIP? Even an experienced investor could stop his or her regular SIP.
|A retired person having access to more cash from his retirement pool rushed into the market when the general mood was euphoric. He is frozen now, scared to invest more money, and scared to sell out and crystallise his losses. In this case, he invested because he had access to cash, not because he had a plan to invest. Hence the terrifying feeling and inability to decide what to do.
|Having heard the concept of averaging, the new investor blindly adds to his stock position as the stock price declines. He just heard the concept and did not hear that investing in stocks requires the ability to research and analyse. End result, he could be throwing more money behind a bad investment. Instead of averaging, he probably could lose more money.
|In an oscillating market, some funds may do well, as the fund manager could be good at trading. Novice investors looking at the near term performance, may be tempted to invest in this fund by moving out of a good process driven disciplined mutual fund. The shuffling could be expensive in many ways;
|The new fund, may be totally unsuitable to achieve the long term goals
|The new fund may have a high expense ratio.
|There could be short term capital gains on the fund that he sold out.
Investors switch strategies without thinking the long term implications of such moves. Because they did not have a solid reason for switching strategies, subsequent behaviour of the asset classes in which they have invested have even more profound impact on the behaviour of the investor.
Since the profit is booked and removed periodically, the impact of compounding is reduced.
The most serious risk of such changing strategies is that the investor does not reach his or her financial goals.
All the above disadvantages mean that it makes sense to stick to a strategy and not be fooled into boredom by the near term oscillation of the market.
Remember, it is best to
|Have a plan, and a solid reason to invest.
|Stick to the plan, and review it once in a while and not when market keeps oscillating.
|Remember expense ratios, tax on short term capital gains all have serious implications on wealth creation.
Therefore while it doesn’t make sense to pay attention to the market that swings like a monkey, what should rather be idealized is the famous three monkeys who preach – hear no evil, see no evil and speak no evil
. In the investment context it means keep yourself away from the chaos that diverts your investments from your financial goals.
At Quantum, the investment strategy for Quantum Long Term Equity Fund, does not change with changing market scenarios. The focus is always on stock specific issues and valuations.