Keep Your Faith In Equities
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- By HEMANT RUSTAGI
CEO Wiseinvest Advisors
The wild swings in the stock market over the last few months have been making even the most seasoned equity investors jittery, leave alone the investors who are new to equity investing. As the market place consists of investors with different temperaments, even the reactions vary significantly. For example, in a falling market, while some investors may feel compelled to sell, some others may see it as an opportunity to invest. Irrespective of the manner in which investors handle market downturns, there are certain concerns that weigh on their minds. Let us analyse some of these and the manner in which these need to be tackled.
Why have my profits turned into losses?
Every time the stock market turns volatile, investors are faced with a situation wherein a healthy-looking portfolio starts showing dramatically shrunk profits or even losses. However, any panic reaction to the short-term performance of an asset class that has a proven track record of outperforming other asset classes in the long run can be suicidal. That’s why it makes sense not only to remain invested, but also continue the investment process without interruption.
With the markets turning volatile every now and then, how will I make money in the long term?
Since stock markets have a tendency to be volatile, investors experience ups and downs of varying degree from time to time. But it is also a fact that in the long term the stock markets generally go up. Thankfully, there are strategies to turn volatility to one’s advantage. One such strategy is to follow a disciplined approach. By doing so, one can earn positive real rate of return, i.e. return minus inflation, and make the portfolio grow at a healthy rate.
Why have some of the funds in my portfolio fallen more than the others?
A mutual fund portfolio may have a mix of diversified, mid-cap, small-cap, and specialty as well as sector funds. Different types of funds react differently in a rising as well as falling market. For example, generally a mid-cap fund falls more than a large-cap fund in a falling market. Investors who follow a haphazard approach to investing may end up owning funds that may fall more than the average. Therefore, for a successful long-term investor, it is imperative to design a well-balanced portfolio. It is equally important to understand the likely impact on the performance in case the market turns bearish or volatile.
When I book profits, the market continues to go up and when I don’t, it falls. Why does this happen?
This is a situation that investors face many times. Actually this happens when one tries to time the market. It is a well-known fact that even the most experienced fund managers find it difficult to time the market successfully on a consistent basis. No wonder, when a common investor tries to do this, he invariably finds the market moving in the opposite direction.
While it is a fact that even a long-term investor needs to book profits, the key to success is to have a proper strategy in place. One such strategy is to rebalance the portfolio periodically. Rebalancing is a method by which the allocation to debt and equity are brought back to the original level. This is necessary as one asset class grows faster than another. Rebalancing becomes necessary because we make investments to achieve the best results at an acceptable level of risk. By doing nothing, we violate this premise and get exposed to an unacceptable level of risk.[PAGE BREAK]
Where do we go from here? The question is, how the stock market will perform going forward? Though there are quite a few international as well as domestic factors contributing to the present depressing state of the stock market, it would be wrong to get disappointed and lose faith in the potential of this wonderful asset class called equity. For a long-term investor, equities remain potentially the most rewarding investment option. All one needs to do is to select good quality funds and take a long-term approach. Needless to say, the volatility in the short term should be ignored by remaining focused on the long-term investment goals.