Wednesday, August 13, 2008

Market uncertainties - How to make the most of it

This year we have seen volatility in almost every possible area right from equity markets to commodities, oil, currency, interest rates, and inflation. Oil has corrected by 20% from its top of $147 to around $118 now. Rupee though in a band has been appreciating in the last couple of weeks. Equity markets have once again surprised everyone with a bounce back to 15000 levels. Majority of the people are still confident that this is a bear market and the market could be headed to lower levels. They might be right but at the same time could also be wrong. Time and again the markets have made most analyzed opinions look like weather predictions and one should certainly not take such predictions as advice for your situation.

For a moment, let us consider a few ?What ifs?. What would happen if oil corrects to $100 or lower? What would happen if rupee appreciates from here on (which looks like a strong possibility)? What if the monsoons are good and agricultural output is better than expected? What if government pushes ahead with banking, insurance, pension and disinvestment reforms to improve its track record? The earnings of the last quarter were in line with expectations and in fact a tad better than what many had expected. A confluence of all or most of these factors have the propensity to propel the market further and provide for a decent rally. At the same time what if oil rockets up and crosses $150 and all other factors don?t fall in place. If we indeed get into such a zone, no asset can actually protect the value of money and there might be no worthy investment in such situations. This is what we call as uncertainty and this is precisely why people can expect higher returns from equity.

Everyone understands the principle of buying low and selling high. How many people do you think actually bought when the markets were going lower. Very few I bet. Though the principle might sound very simple, implementing it takes a lot of guts. In such situations most people tend to alter their investment strategy by either exiting existing investments or not making new investments. However for the brave ones, absolute returns have been in excess of 20% in a matter of weeks.

What should one be doing now?

First, do not alter your investment strategy just because everyone else is doing so or because the experts say we are headed for doom. Understand that big money is made in equity markets by staying invested for an extended period of time, by certainly buying low and then selling high. You will occasionally make money by flipping stocks and through tips but this should not be construed as a consistent viable investment strategy. Create an investment strategy if you do not have one. Variables that should be considered here are your financial needs, current financial situation, liquidity needs, time horizon, and actual behavior towards risk.
Ask yourself how did you react in the current equity market downturn? If your mood swings were as volatile as the market swings, you might not have the risk behavior to take on a lot of equity in your portfolio. Changing one?s behavior is very difficult and a prudent strategy would be to cut down your equity exposure on rallies. One is likely to witness a lot of profit booking on subsequent rises and hence don?t be surprised if you see markets down after consistent rallies. However if you have been calm during such turbulent times, you should look at adding equity when the market goes down or corrects.
With interest rates going up, there are a lot of Fixed Maturity Plans with higher yields coming out. The yields in them could be anywhere between 10.2% and 11.15%. However make sure that the indicative portfolio is checked thoroughly. Avoid real estate bonds even though they could give higher yields. Industry insiders believe that a couple of real estate players have defaulted on their payments and this will have an impact on NAVs of some of the existing FMPs. (View - Fixed Maturity Plans open Now)
Residential Real Estate prices have been on a downswing for quite some time and are expected to correct another 25% comfortably. The key question is by when can this happen. Real Estate normally takes time to correct unlike stocks and hence the period could be anywhere between 6-18 months. Also rising interest rates have given heartburns to a lot of homeowners. Infact some people have also undergone counseling as they have developed suicidal tendencies. We strongly recommend not going in for high amount and high interest rate loans. Even if residential prices correct by 15% and interest rates come down slightly in the next 12 months, you will emerge as a winner by being patient.
Look at investing in gold on further corrections.
Market downturns are certainly not easy to digest but you should not let these unduly affect you. You should concentrate on your financial goals, portfolio, overall financial situation and how best to capitalize during such uncertain times.

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