Jun 06, 2012, 11.38 AM IST
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.
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.
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.
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.
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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