The equity markets have been extremely volatile over the last 6 months. While the indexes have corrected by 10-15% only, we can see plenty of fundamentally strong stocks that are currently quoting 20-30% lower their all time highs.
While its true that not all the individuals have the same patience level to hold through the volatility, we have tried writing down these Do’s and Don’ts to encourage investors look beyond the market noise and be a long term investor in equities.
DONT's:
1. Don’t stop your SIP
When equity markets fall, investors get over concerned with unrealized negative returns and that is where they doubt whether to continue or stop the SIP. We suggest “Don’t stop your SIP”.
Instead, when markets are down, your monthly SIP will accumulate more units. And when markets bounce back, your accumulated units at an average lower cost per unit would give you higher returns. Hence, being patient as a long term investor and continuing the SIP is essential for wealth creation.
Direct equity investors are usually very excited to enter into markets and buy those stocks which were favorites of the markets, but we would suggest “Hold on to your emotions”.
Don’t just buy something out of emotions, because investing is not just about buying stocks of company which gave great performance in one or two quarters, but may not show similar performance in long term.
Note that: During the correction stocks with weak businesses corrects the most. So, before investing, understand the industry and business models, and remember what Warren Buffet says, “Invest in the business and not the stock”.
3. Invest only after knowing your risk appetite
As equity markets have been very volatile in last few months, we see some fundamentally good stocks currently quoting at 20-30% lower than their all time highs. Although one can start investing at these levels as valuations are pretty attractive, but there’s still uncertainty in the current markets due to several macro economic factors. So, its likely that markets may fall further in the coming months, that’s where we say that you can invest in SIP form at every 5%-6% fall from here on.
4. Don’t pay too much attention to market news
If you are a long term investor, stay away from noise. While choosing your investments in particular businesses, its important to understand that businesses will have several external challenges to generate profits. These challenges can be supply constraints, inflation, elections, etc which may affect the short term profitability. However, strong businesses recover these challenges as macro conditions improves. Paying attention to news will definitely disturb you as an investor, which may result in early exits from the investments without giving much thought.
We would say “Sticking to your goals & time horizon, following the basics will surely help you make wealth in the long term”.
5. Don’t keep looking at your portfolio
Whenever the markets are down, people tend to look at the news on one side and their portfolio on the other side.
But looking at your investment portfolio every day will only develop anxiety within you, which will force you into a wrong move. We say you judge your investments quarterly or yearly using the earnings report of the companies you are invested in.
DO's:
1. Create Emergency Fund
Always keep a 6-12 months of your monthly expenses as emergency fund in a highly liquid financial product. When markets are low, people try to be opportunists & invest these contingency fund in stocks, but let us warn you never ever to make this mistake. These funds should only be used in case of job loss, salary cut or any other emergencies.
2. Markets can take time to recover
The current market situation is not just about rate hikes and high inflation, it is a global economic issue with supply constraints. IMF (International Monetary fund) has already declared it worse than the 2008 recession. So, it may take 4-6 quarters to recover. We would say that “you don’t have to panic as these conditions will improve”.
Gold as an considered to be an inflation hedged investment & hence we recommend you have 5-6 percent of your investment in gold. In the past as well, whenever there have been global economic crises, investment in gold has given a decent return.
4. Increase your SIP amount
When the markets are overbought or at high valuations, investing a lump sum would be risky. However, investing in SIP helps in averaging down your cost. Further, if you do increase the amount of SIP you can benefit from having more units at lower cost.
5. Hold your existing lump sum investments in quality blue-chip stocks
Most investors book losses on quality blue-chip stocks during a market correction due to lack of patience. One must understand that a bluechip stock are stable businesses with a cash rich reserves. These businesses have the resources to perform better than other new businesses when economies are not doing so well and hence are safer investments within the equity market. Also, in the past, you will see the stocks of these companies have rebounded and moved higher when the economies start doing well. Hence, we suggest you to hold your investments in a bluechip stock. You can also built a portfolio around these bluechip stocks when the economies are not doing well.
Before we start filling our shopping baskets, try to understand three things:
a) Nature of business for the stock that you will be buying so you need to think about how the coming quarters will fair in the given situation.
b) Survival Capacity of the business that you intend to buy because the current situation can drag some small businesses into bad shape.
c) The Longevity of the business plays quite an important role because such global crises have been a part of the past and these businesses have that art to sail through it that is why they are still thriving.
These qualities can be seen in the blue-chip stocks.
