Is this the end? I bet all of us know the answer to this one. We have seen booms and busts earlier as well and this is not the first time one is witnessing such turmoil. Neither is this the last bust. What is different is the extent and depth of the problem that has left even century old giants biting the dust? Take the case of AIG. What were the executives thinking there? An insurance company is normally supposed to follow prudent risk management techniques. AIG and other institutions have spent millions of dollars on risk management but God only knows what kind of risk management was implemented and practiced. AIG disregarded the very basic tenets of risk and in the end had to be bailed out by the Fed.
The fall of these institutions confirms that not only Human Greed but also Human Stupidity is infinite. There is a big lesson here for investors however big or small they are. Leverage and Greed are nothing but weapons of self & financial destruction. Stay away from Leverage and Greed however enticing the results might be. It will someday lead you to ruin. If you utilize your own funds for investing, chances are that you might never lose money on an equity investment if your choice of investment is good and time horizon is long enough to tide the volatility. Surely your portfolio can go down but you will not be bankrupt by investing in good quality growth oriented businesses. Any equity investment can go down in the short run by as much as 40% but that does not mean you have lost the money. There are certain cardinal rules that one must follow in all types of situations.
1] Understand your priorities and needs. Always have a financial goal in mind. If you cannot set tangible financial goals such as your child’s education, your retirement income or corpus for starting business, you then still need to be very clear about your objectives. It is very important to know yourself and to understand your financial situation completely. Your investment strategy should be based on your financial goals and not on how the market reacts or swings.
2] You must understand your time horizon for the investment very well and only invest long term money in the stock market. Stocks are good long term investments but extremely dangerous short term ones.
3] I strongly urge you to stay away from leverage and debt. Ensure that you have minimal debt and do not borrow to just look rich. Maruti SX4 might say Men are back, but take stock of whether you can really afford the car and more importantly whether you need it over other objectives that you have.
4] In such times no asset class will be able to generate real returns post inflation and taxes (that includes cash). However having cash is better because you can still deploy funds in investments if equities and gold should they do down further.
5] Take stock of your overall asset allocation and your goals. If your equity asset allocation has gone down or you do not have equity investments, start investing in equity in a staggered fashion. People with goals atleast 5-10 years away can look at scaling up their equity allocation as well. Gold has the potential to do well in the next 2-3 years; however it is again a very volatile asset class. So make staggered investments in gold during sharp dips and corrections that we have witnessed in the last several weeks. A return of 12-15% can be expected from gold.
6] Stay away from real estate. Today transactions are down in Mumbai by almost 90% and across the country we have witnessed a huge drop in sales figures. Infact real estate prices are so atrocious that they have to correct by (25-30%). One has already witnessed a 10-15% correction and the patient ones will be rewarded with excellent deals in the next 12-18 months. Majority of the investment population would know that timing the equity market is a very difficult feat to achieve. However timing the real estate market is an absolute must and the key to success if you wish to make any money through it. For the time being, just stay away from real estate.
7] If you are in the lowest or zero tax bracket, park your short term money in short term fixed deposits. If you are in the highest tax bracket, park your funds in a combination of liquid plus funds, short term fixed maturity plans and fixed deposits. Don’t be adventurous with your short term money.
8] Don’t try to recover any short term losses by being aggressive and taking on more risks. Understand the risks and its consequences on your financial situations.
9] Finally admit that you are human and that you can go wrong or have gone wrong. It’s ok to go wrong or commit mistakes. You must learn from these and take corrective measures.
Some silver lining at the end: Every columnist worth his salt likes to quote Warren Buffet. Buffet has been walking his talk for years and has now started buying in this period of turmoil. This certainly does not mean that the markets will not go down from here or that they will immediately bounce back. The actual risk in the equity markets today is much lower than the perceived risk and hence one must not do anything radical. Stay calm and Stay Put.
There is no silver bullet or a direct answer on what should be done in situations like these. It is largely a function of your overall financial situation, financial goals, time horizon, current asset allocation, risk behavior and the investment strategy that you have to chalk out.
posted by amey316 @ 9:54 AM
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