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Think rationally during irrational times

The basic rule to reap the best from your portfolio is �Trust.� When market acts in a volatile way, instead of abandoning your portfolio stick to it. Financial advisor Hemant Rustogi shares various investors� apprehension and the way to deal with them during the turmoil time.

April 27, 2012 / 12:59 PM IST

While volatility in the stock market is a natural phenomenon, different investors react differently when faced with it. Despite knowing that dealing with economic cycles is a part and parcel of equity investing, many investors resort to panic selling and look for alternative assets when markets turn negative.  Needless to say, such a haphazard approach often jeopardizes long-term prospects of their equity portfolio. Here are some of the doubts that often creep into the minds of investors during uncertain times and how to handle them:

Have I been investing the right way?

As the valuation of their portfolio falls, many investors start questioning their investment strategy and the quality of their portfolio. The fact, however, is that if the fall is in line with the market as well as the peer group, there is no reason to panic. Therefore, one has to take a hard look at funds in the portfolio that under-perform the peer group on a consistent basis. Another issue that requires attention is whether your allocation to different asset classes is in line with your risk profile or not. If your asset mix takes you beyond your acceptable risk level, you may not be able to take volatility in your stride.

Therefore, to ensure that you continue with your investment process un-interruptedly, determine your risk level before investing. Remember, it is the level of risk that provides the guidance about the kind of return you can expect as well as the level of volatility, while achieving it.

Also ensure that you have a comprehensive, well thought-out plan for achieving your goals. It helps if the plan has the required flexibility to take care of changes that might take place in your needs overtime. 

Does my portfolio need a review?

While the term �Volatility� may evoke fear and concern, it is not advisable to start questioning the presence of equity in the portfolio during market downturns. One way to tackle market volatility is to invest with a clear idea about one�s time horizon and knowing what to expect both in terms of returns and risk. For example, if you invest in equity funds with an unflinching commitment to continue this process for the next 10-15 years, it would be much easier to handle intermittent periods of volatility.

Needless to say, it pays to review your portfolio on an on-going basis. To do so, you must consider the following:

  • How is your portfolio performing from the view point of your personal goals? Are you comfortable with the price fluctuations that may have occurred keeping in view your short term, medium term, and long term goals?
  • How are your investments performing compared with others in the same category? It is important as for example, a 10% growth in your fund may look great, but not if the average returns given by other funds in the same category is 15 percent. However, too much emphasis shouldn�t be put on the short term performance.

While reviewing the portfolio is important to ensure that your investments remain on track, it is equally important to make right selections. Although it can be tempting to go for the top performing fund at the time of making investment, the key is to remember that the desire to take risk should not exceed your capacity to take risk. Remember, a long term approach helps in reaping the benefits from the expertise of the professional fund managers as your investments are likely to appreciate steadily over time, overcoming most temporary setbacks. (Click here to Login to your portfolio)

SIP or lump sum investment?

It is heartening to see an increasing number of investors following a goal based investing strategy. No wonder, Systematic Investment Plan (SIP) has emerged as a popular mechanism for investing in equity funds. Although SIP is an efficient method of turning volatility to one�s advantage, one can�t undermine the importance of investing long-term lump sum money in equity funds periodically. A combination of these two investment strategies can get the best results over the long-term. The key, however, remains the commitment to stay invested for a pre-decided time horizon.

Unfortunately, many investors, in spite of showing a great deal of enthusiasm in the beginning, fail to look beyond a couple of years. In fact, there are investors who sign up for SIP only for one year at a time. This kind of tentative approach towards this volatile but potentially the best asset class makes it difficult for them to accept not-so-encouraging results in a current market like situation. (Click here to know the power of SIP)

That�s why; a tentative approach compels them to analyze the situation a fresh every year. Invariably, one would end up taking decisions that are driven by emotions and the current market moods rather than any logic. It�s time to have a re-think on this and start following �buy and hold� strategy to get the best from equities.

Hemant Rustagi

The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at