Wednesday, May 13, 2009

Some Do’s and Don’ts to tackle the turbulent times

The current crisis is perhaps the worst that any investor could face in his life time. No wonder, these turbulent times have played havoc in the minds of investors including the most experienced and the seasoned ones. Needless to say, small investors are the worst hit by this downturn both in terms of capital loss as well as loss of confidence in their investment strategy. In times like these, investors often feel compelled to take some irrational decisions that can have a devastating effect on their prospects to achieve long-term investment goals.

It is, therefore, necessary for investors to demonstrate patience and perseverance to tackle these difficult times. Let us discuss a few do’s and don’ts that can go a long way in tackling these extraordinary times.

Do continue with your SIPs

One of the major disturbing trends that have emerged in the recent times is rethinking by many investors on their investments being made through Systematic Investment Plans (SIPs) in equity funds. While some have discontinued their SIPs mid way, others have decided not to renew the SIP for a further time period.

While it is true that even SIP investors have also suffered losses in the current downturn, the impact on their portfolios is much less compared to those who invested a lump sum amount at the peak levels. The point to remember is that their fresh investments at the current levels through SIP will go a long way in accelerating the recovery process going forward. The “Rupee Cost Averaging” will work the best for them as the current NAVs are at considerable lower levels as compared to say a year ago.

Remember, a disciplined approach takes away the speculative element from the investment strategy and ensures success. Therefore, if you are thinking of discontinuing your SIP, you need to rethink. By bringing your average cost down in a disciplined manner, you could be amongst the first ones to benefit from the market recovery, as and when it happens.

Don’t switch existing equity investments into conservative options in a panic
We make our worst investment mistakes in panic situations. The current scenario is not different. Many investors are moving their equity investments into conservative options like fixed deposits or debt and debt oriented funds. The fall in the equity portfolio value along with continuous negative news flows and the resultant uncertainties are adding to the anxiety for many more investors. While the move to switch investments into more conservative options may seem like a sensible thing to do, the fact remains that selling in a down market can be a costly mistake. Though investing fresh money in conservative options to remove the imbalance in the portfolio is all right, a haphazard approach for existing investments in equities can expose you to the risk of falling short of long term financial goals.

Don’t equate negative returns with poor performance

Negative returns from equity funds are commonly perceived as poor performance. In a current market like situation where the stock market has witnessed a steep fall over the last one year or so, even the best of fund mangers have given negative returns. The key is to compare the performance of your funds with their peer groups and then analyse their performance. If your funds have fallen less than their peer group and the fund managers have stuck to their investment philosophies, it makes sense to continue with them.
History shows that quality funds yield above average returns over time. The years of spectacular growth will help even out your portfolio returns during bear markets. Therefore, it is vital that you don’t allow your expectations to be distorted by extraordinary returns during the bull runs as well as by the dismal returns during the bear markets.

Don’t hesitate to realign your portfolio

Many of us have the tendency to chase performance in a rising market and hence end up investing a significant portion of our investments in those equity funds that are flavour of the month. The result in most cases is over-exposure to certain sectors and segments of the market like mid-cap and small cap thereby exposing us to much higher levels of risk than our risk taking capacity. Considering the current economic scenario, some of the sectors as well as segments of the stock market are likely to struggle over the next couple of years. Therefore, it makes sense to realign the portfolio in favour of diversified funds that have bias towards the large cap stocks.

However, many investors simply refuse to make changes, irrespective of the unfavourable mix of funds in the portfolio as they simply hate the idea of booking losses. More often than not, they take it as a personal defeat and refuse to exit from a fund unless the NAV reaches the level at which they got into the fund. They fail to realize that a non-performing fund will take much longer to recover the losses, if at all.

On the other hand, by moving money to a fund that is likely to do better in future, not only can they recover the losses much faster but also benefit from the healthy growth in the long run. Though equity investments are essentially long term investments, it is equally necessary to make changes in the portfolio from time to time to get the best results.
-Hemant Rustagi

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