How to navigate a chaotic market

By Larissa Fernand |  12-03-20 | 
 
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About the Author
Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

How finicky the market can be.

In just 69 days of 2020, the Sensex crossed the 42,000 mark, and recorded its worst 1-day loss, ever.

All in just 69 days.

And then we have March 11 which saw the Sensex inch upward, and today the market is rattled once again, taking its cue from global counterparts.

So what must you do?

Perspective helps.

I like what Liz Sonders, the chief investment strategist at Charles Schwab recently said on CNBC Make it: “Investing should never be about a moment in time; it should always be about a process over time.”

Why do we keep harping on taking a long view? Because it is only the fullness of time that enables you to create wealth. Short term gyrations are misleading and reactions to them can severely dent your returns.

You must always remember that volatility is NOT an anomaly, when it comes to the stock market. The triggers could be different though: Persian Gulf crisis (1990), global recession (1992), Asian financial crisis (1997), dotcom meltdown (2000), India-Pakistan standoff that brought both sides close to war (2001), the 9/11 terrorist attacks on the Twin Towers in New York (2001), war in Iraq (2003), Global Financial Crisis (2008), European debt debacle (2010), and more recently the trade war between China and the U.S., and other geo-political concerns.

Even though periods of downturn can be scary and dramatic, they’ve historically just been interruptions in the market’s overall growth. Look at the journey the Sensex has had from a base value of 100 in 1979. But it has not been a smooth ride.

I remember the period between February 2000 and September 2001, the Sensex saw a 55% plunge. Ok, that was a bear market. But it did test the mettle of investors. Or take January 2008 to October 2008, a plunge of over 60%. Or, April 19922 to 1993, in that one year period, the market dipped over 55%.

As Benjamin Graham said, “the investor’s chief problem and his worst enemy is likely to be himself. In the end, how your investments behave is much less important than how you behave.”

There will be times of instability and chaos. But this has its advantage. The pain increases the pleasure.

As Morgan Housel of Collaborative Fund recently said, “the majority of your lifetime investment returns will be determined by decisions that take place during a small minority of the time. This is one of those times.”

Markets change minute-by-minute. Human nature barely changes millennium-by-millennium. Therein lies your edge. Human reactions will be determined predominantly fear and greed.

Remember John Bogle’s words: “Your success in investing will depend in part on your character and guts, and in part on your ability to realize that at the height of ebullience and depth of despair, this too shall pass.”

Stick to your strategy. Revisit your fundamental analysis. Read the views of the fund manager and how he is positioning his portfolio. See whether the underlying characteristics that identify a good or bad investment have changed or are the same.

Should you buy? Should you continue investing?

From where I am sitting, things look bleak. I am not making predictions about a deep downturn or a recession. But it is apparent that the news is bleak. So I am following all the advice I mention above. I am continuing my systematic investments.

If you are in your 20s or 30s, please keep investing. Your investment will compound. Compounding does not rely on the highest return; it relies on time.

As Pankaj Murarka of Renaissance Investment Managers said at the Morningstar Investment Conference in 2018, “Volatility is the nature of the business. Every crisis is an opportunity to buy into some high-quality businesses. Don't let go a crisis go waste. You can't waste an opportunity. You can't waste a crisis if you are a long-term investor.” So if you have a stock on your list that you steered clear of due to high valuations, time to revisit that list.

However, if you are 58 and approaching retirement, I would not be so sure of the above. So I will say what I have always said, take the help of a reputed financial planner who will be able to give you accurate advice based on your situation.

And remember, this too shall pass.

Do read Experts tell you what to do in a volatile market.

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