Market turmoils – How to capitalize on them

It’s not new for sentiments in the equity markets to swing like a pendulum. It’s just that the reasons are different every time. One will however see that investors and spectators often go through an emotional rollercoaster every time the Sensex goes up and down sharply. Investors are normally willing to wear rose coloured glasses when things are hunky-dory but at the first sign of trouble or in turbulent times look at rocking the same boat.

Let’s face it that this volatility is an integral part of the stock markets and it has always been there and will always be there. It is just that the intensity and the velocity of the Sensex movements might have changed based on the depth and the breadth of the capital markets.

The reasons for sharp up-ticks and falls will always be different but beneath all the fundamental reasons there will always be the Sword of Sentiment (which ultimately drives liquidity). There is no way anyone in this world can predict how different market participants will react to different kinds of news. Also there is no way anyone can accurately predict the events that will unfold in a relatively shorter period of time. Nobody knew that rupee will appreciate so sharply, or that the interest rates will rise so sharply or that this sub prime mess was bound to happen now. Infact the sub prime mess did not come up now, but came up in February. Investors however conveniently ignored this and the market went up substantially in the March to July timeframe and made new highs.

• 'Subprime' woes – What should investors do?

So what should investors really do this time and every time such phases occur?

People start to question the fundamentals of all companies during such volatile times. What impact can a sub prime mess have over the fundamentals of Reliance Industries or a BHEL? Not that I see any. When such scares happen, it tends to take everything down; like a rising tide that lifts all the boats.

Here are 3 things investors need to do in such times

1. Keep a check on your emotions
Do not let the headlines and the bloodbath as portrayed all around affect your investment strategy. Cut yourself off from the financial information overload that happens and think straight. This is easier said than done and is often the most difficult step to achieve in an investment strategy. Hence it is often important to write an investment policy on when to buy, when to sell and when to make changes to your portfolio & asset allocation. Like Nick Murray once said “The role of the advisor is not to manage your money but to manage you”.

2. Review your asset allocation and portfolio
How has your portfolio done as compared to investment objectives that you have set? If your equity holdings have fallen by 10% or more, look at adding to your existing positions (only in case of sound businesses (stocks) and well managed diversified equity funds). Take a staggered approach to accumulate high quality blue chip stocks and your existing holdings in mutual funds.

If you feel that you cannot stomach the high equity exposure and are continuously sweating out emotionally, then you should lighten your equity exposure (to a more comfortable level) starting with investments where you have made money and after considering the tax impact.  If there are some winners and some major losers, then you can stick to the winners and chuck out the losers. I am not suggesting that you chuck out every losing stock or fund, as there are times when even fundamentally good stocks and mutual funds take a beating. Their future potential is far more important than the short-term temporary blips and hence it is important to review all investments individually. In such times your asset allocation will go down in terms of your equity exposure and you will need to buy to maintain a strategic asset allocation and hence automatically will tend to buy now and sell at higher levels.

3. Don’t wait to invest right at the bottom and more importantly Act
Though it requires a lot of nerve to invest when the markets are going down and when everyone on TV suddenly turns pessimistic and does a volte-face, it is important to act and buy investments that you have always felt were more expensive. In short keep your shopping list ready and keep making purchases steadily. Don’t wait to perfectly buy at the bottom as one just needs to be plain lucky to get in at the perfect bottom.

More importantly keep a tight eye on your asset allocation and make changes when it significantly deviates from the initial settings that you have made and yes give due respect to risk and learn to make it work for you.

Everybody seems to have forgotten the sub prime mess that this world was in the last couple of months, and stocks have risen across the globe erasing most of the losses made. We are yet again at more or less the same point where we were in July. Your guess is as good as mine as to what will happen next or whether a crowd of market participants will have Positive or Negative Sentiments. Make market negative sentiment your friend and don’t run away from it…

The word “Crisis” in Chinese is composed of 2 characters the first, symbol of danger and the second, of opportunity. Make sure as a long-term investor, your dictionary meaning of “financial turmoil in the capital market” only means opportunity.

- Amar Pandit

The author is a practising Certified Financial Planner. He can be reached at amar.pandit@moneycontrol.com

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