The daily blips of the market are, in fact, noise – noise that is very difficult for most investors to tune out."
Seth Klarman – American Hedge fund manager
When the 30-share Bombay Stock Exchange Sensitive Index, or Sensex, goes up 2.5 per cent on a single day, only to fall by similar percentage points within two days (down 1,425 points on Thursday), investors know that they are in for a rough ride. The larger picture, though, continues to be grim.
The three-month war in Ukraine has led to a spike in inflation across the world. India's numbers are no different. The Wholesale Price Index, at 15.08 per cent, is at a 30-year high. The Reserve Bank of India's sudden decision to increase rates and cash reserve ratio shows that things are getting out of hand. And, of course, the over two-year-old pandemic continues to wear us down, both in terms of health and wealth.
One of the great things that happened in the earlier part of the pandemic was a secular rise in stock markets in India. While the country went into a complete lockdown in March 2020, the Sensex turned around sharply. So, from a low of 25,600 points in March 2020, the Sensex more than doubled in a year. This led to millions of new retail investors entering the markets. The Indian equity markets have seen the addition of over 10 million new investors in the past couple of years, many of whom are possibly first-timers as well. Many would be experiencing this high volatility, with a downward bias for the first time.
There is bound to be nervousness among them. And it is also the time when a lot of advice will be thrown at them – book profits (if you have them), rupee-cost averaging, buy the dip, put a lump sum and many more. A piece of simple advice: Ignore all the noise and take that summer vacation. There is no need to participate in this market except through systematic investment plans (SIPs) of mutual funds.
If you have SIPs, continue with them. The reason: If the market falls further, which it absolutely can, the same amount of money will earn you more units of the same scheme. And when markets turn around, whenever it may, these additional units will earn extremely good money.
On the other hand, ideas like rupee-cost averaging may not work because one does not know when the market will bottom out. In such a scenario, if the stock keeps falling, it is impossible to buy at every fall. It is like trying to catch a falling knife. The same goes for buying the dip. Such terms sound good on paper and apply to those with considerable resources to keep buying. But if you are an average investor, such strategies don't work over a longer period.
And even if you are sitting on some profits, there is no need to book it. More so if they are good blue-chip stocks. A Reliance or HDFC may fall, but it will recover eventually because all investors will seek the safety of good companies. Yes, if you have some stocks that you 'punted' on for some quick gains, and they are in the green (which one doubts in this market), exit them. But if they are in red, sit tight. There isn't much you can do. So, just wait it out.
Yes, it may mean some tears, but it is also a lesson to never buy unknown stocks for a quick buck. Many fraudulent players in the stock market have been known to promote such stocks, and investors have fallen for it. The sad part: These players have also been known to promote these stocks so that they can get an exit while hapless investors get stuck with them.
Lastly, don't bother investing a lumpsum now because you don't know how long this carnage will last. The Sensex has already corrected over 15 per cent. There seems to be no end in sight. Much like the Ukraine war, inflation, pandemic and other concerns are overwhelming the entire world.
To end with an example: Recently, a friend approached his financial planner (FP). His concern: Soon, he was about to become debt-free completely, as his home loan was coming to an end. Usually, a debt-free person should be happy, but he wanted to leverage the property and raise some money against it (loan against property) to invest in the stock market. He believed that since the property wasn't earning anything, he might as well use it to increase his stock market exposure. Excerpts from the conversation:
FP: Do you know when the market will turn around?
He: Obviously, no.
FP: Then, why do you want to pay 8.5 per cent (interest rate on loan against property) when you have no idea whether the market will fall/rise further?
That was the end of the conversation.
Lesson: Don't try to time the market.
In short, forget about the stock market, at least for some time (it could be weeks or even months). And again, take that summer holiday.
(Joydeep Ghosh is a senior journalist)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.