Moneycontrol
Jun 06, 2012 11:38 AM IST | Source: personalfn.com

3 Intelligent investment moves to make right now

Things aren't looking very good right now, we know. Spain has reported a contraction in its economic growth, the United Kingdom GDP data indicates that this is likely a double dip recession, and S&P has downgraded India from stable to negative.

3 Intelligent investment moves to make right now

Things aren't looking very good right now, we know. Spain has reported a contraction in its economic growth, the United Kingdom GDP data indicates that this is likely a double dip recession, and S&P has downgraded India from stable to negative.

Any investor worth this salt, who looks at his portfolio even weekly if not daily, and who reads even a little bit of financial news every few days would know that markets have been going through some turmoil in the last few weeks.
It would be hard to miss considering words like 'global recession', 'markets tanking', 'Sensex at 15,000 next' and so on. With people seeing their portfolio values dropping, and their emotions running high, overall noise increases.

At these times, investors tend to make mistakes.

You can see the markets falling and you hear 'experts' saying it might fall further, and your natural instinctive reaction is to sell - get out as quickly as you can. This is normal preservation instinct.

But in the world of investing, following this instinct could be a mistake - and a costly one at that.

Here's why.

1. It's Almost Never Smart to Run from a Bear

The golden rule of making money on investing is to Buy Low and Sell High.
This will not happen if whenever the 'low' comes around, investors run in the opposite direction.

Your first instinct in a seemingly worsening bear market will always be to protect yourself from further pain, and to do so, you would sell, so that while markets continue to fall as you believe they likely will, you can watch the ticker on your screen and know that you saved yourself from an even bigger loss.

But this sentiment is only accurate if you have an investment time horizon that necessitates this. If you don't need the money for another 10 years, what have you achieved by selling in the red other than realizing a loss? If your initial investment was in a sound mutual fund or stock, wouldn't it have been better for you to hold on, or perhaps invest more? That way, when markets climbed again, your purchase that was made in the dip would have yielded a super-normal return. When markets are down it is the best time to make money.

Buying low increases your investment's odds of yielding a super-normal return.

You can ask however, what if I sell when markets are falling, but have still sold above my purchase price - this way I am not realizing a loss but booking a profit. Then when markets fall further I can reinvest in the same schemes. Great, this way would work - but it amounts to market timing. And market timing is something even 'experts' struggle to do.

Somebody once said 'It's not timing the market, it's time in the market' and apparently the Oracle of Omaha agrees - "My favourite time-frame is forever".

Remember though that it is important to have the right mutual funds in your portfolio especially at times like these. you need to strengthen your mutual fund portfolio if you want to take advantage of these turbulent times.
 
2. Know Your Time Horizon and Diversify Accordingly

Buying low can definitely be worth it, provided you have the time horizon flexibility to stay invested till a rise, after you buy low. For this, you have to know your time horizon.

The standard rules are:

For an investment time horizon of less than 3-5 years - no equity for you. This is a debt period. Within this period, there are different kinds of debt you can consider. For example, if you have a time horizon of less than 1 year, invest in liquid / liquid plus funds. For a time horizon of more than 1 year to less than 18 months - 2 years, go for a short term debt fund. For 2-3 years, go for a dynamic bond fund.

For a time horizon of more than 3-5 years, you can have part equity exposure. Part, not all. Be sure to diversify your portfolio across equity, debt and also gold. In 2008 it was gold and debt funds that yielded the 27%+ returns while equity languished.

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3. Keep Your Eye on the Goal

This is the 'why' of investing.
Yes, you are investing to make money, just like everyone else. But why do you want to make money? What do you plan on doing with the wealth that you build? This is where your life goals come in.

Here's an example of a life goal list of Mr. Shah, our favourite fictional character.

Year of Goal

Life Goal

Corpus Required (in today's terms)

2012 Contingency Fund Creation Rs. 3 lakhs
2015 Daughter's Marriage Rs. 8 lakhs
2019 Son's Post Graduation Rs. 20 lakhs
2020 Own Retirement Rs. 6 crore

 

 

 

 

 

 

 

 

 

In order to achieve these goals, investments need to be planned accordingly. For the contingency fund, investments need to be made into a sound liquid plus fund and a certain level cash needs to be kept in the savings account.

For his daughter's marriage which is in 3 years, additional investments should be made into debt as the goal is 3 years away.

For his son's PG, investments until 2016 can be done into a mix of equity-debt-gold, and investment thereafter should be done into debt. The built corpus that is in equity and gold should also be shifted to debt at the appropriate time.

For his own retirement, Mr. Shah needs to continue his systematic investments as per his Financial Plan. See our Retirement Calculator to know your own Retirement Corpus and also know what you need to do to build your retirement corpus

Whether markets rise or fall, Mr. Shah knows that he's investing for certain goals, and can take his decisions accordingly. For example, for his contingency fund, market movements don't matter. For his daughter's marriage related debt investments, downward trending interest rates will help build the corpus. For his son's PG, he can invest surplus funds if any into equity currently to make the most of market volatility and increase his returns by 2016. The same holds for his own retirement.

So you see, it's not just about the market, it's about your goals. Keep these 3 guidelines in mind. They'll help you make sensible and logical investment decisions to achieve the goal corpuses you require. If you'd like to build a Financial Plan to achieve your life goals, call PersonalFN, we'd be happy to help you take advantage of market volatility.

PersonalFN  is a Mumbai based Financial Planning and Mutual Fund Research Firm.

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