Avoid Panic and Stick to your Financial Plan
Mr. Sukant Gupta has been regularly talking to his financial advisor recently to express his concern on the worsening market situation. With the rupee depreciating each day and given the high volatility in the markets, Sukant is worried if he has done the right thing by following his advisors suggestions and investing in equity. With even debt funds having got adversely affected after the RBI’s actions to reduce rupee depreciation, there is a feeling among a majority of debt investors too, to shift to fixed deposits. A few have now also started looking at even Gold as gold prices have gone up in rupee terms due to fall in the rupee value against the US dollar. In short there is a great chance that a majority of investors will now make the mistake of withdrawing from assets that have been affected by the turbulence and move into bank fixed deposits which at the moment seems to be the safest thing to do.
Evaluate your Financial Goals
Before taking any drastic steps, it’s important to revisit your financial goals along with your advisor and understand again the rationale behind creating your asset allocation and therefore your investment portfolio. If you have a long term goal which is nearly 7-10 years away and based on your risk profile too you were advised, let’s say 70% equity and 30% debt exposure, chances are that your portfolio may not look really good at this moment due to the fall in the equity markets. But on the other hand if you realise that your goal is at least a few years away from today, this might be a good reason for you to continue investing in equity and not to suddenly stop equity investments. The time is right to even do a tactical allocation of an additional amount in equities as you will witness good returns on your equity portfolio once the markets improve and move to higher levels a few years from now.
Understanding your Portfolio Behaviour
Asset allocation is designed to provide diversification and not necessarily to fetch the highest returns. Secondly all assets in the portfolio will not perform consistently together. For example, Gold has been consistently performing for the last few years until it fell in the beginning of 2013 and even in dollar terms it has fallen more than 30% from its peak. During this time, long term debt funds did very well. At this moment, both long term debt and equities are not doing well and gold has once again started doing well. If the portfolio consists of only equities, then it might do well during good times, but suffer badly if markets fall. But if you have created a diversified portfolio consisting of equity, debt, gold, etc., then chances of all the assets not doing well in a given period is very less. Secondly don’t keep chasing assets which are doing well at a particular point of time. This will result in you changing and churning your portfolio for temporary gain and when the assets which you sold start performing, you will miss out on the gains.
A better understanding of your portfolio behaviour while constructing one, can help you to understand how your portfolio may behave in extreme situations. It’s also important to realise that volatility in a portfolio comprising equity is a given but when there are extreme situations resulting in a major fall in the equity indices, it makes more sense to stay put as the best returns in equities have come in the years following the period which were the worst. We are going through a very delicate situation where the returns might really not come through in the next few months, but if you are able to withstand the temporary pain and stick to your portfolio, designed keeping you financial goals in mind, you will be able to reap the high returns which will follow this painful period.
Panic will only lead you away from assets which have a greater chance of providing you better returns and make you stick to safe assets which may not help you beat inflation or are not tax friendly.