Investors become analysts in bear markets and fund managers in bull markets – G Maran
When I first heard this above quote, I found it funny as well as insightful. Its effectiveness was underscored recently when a well-meaning customer reached out saying “lets book profits, markets seem to be at a high now.” At around the same time, another customer, who wanted no truck with the market a mere five months back when it was closer to its lows, called us to say, “Is it was a good time to invest? The economy seems to be recovering.”
The last few months have seen market volatility at never-seen-before levels. We saw a sharp drop, with a 30-35 per cent drop in key indices within a month. Yet, before one could even say “bear,” a swift recovery also followed in the next 3-4 months, with most indices recovering smartly from their March lows, to get to their pre-COVID highs. Also, a sign of the times is that investors have more-than-ever information in their hands, useful or otherwise, leading to both analysis-paralysis and panic-stricken action.
Handling mixed emotions
Such emotional reactions are completely understandable. On the one hand, there is loss-aversion at work, and for customers who saw their capital 30 per cent down just a few months back and have now recovered most of it, this is the moment to try and protect their capital from another future loss.
On the other hand, there is the fear of missing out or FOMO. For those who either exited in panic after the crash, or didn’t enter expecting another one, this sudden climb comes as a rude shock. Combine that with the market-wizards telling you that the worst is behind and the recovery is well underway, you have someone who wants to jump in before it is too late.
So, coming back to the question, how does one handle such situations? Is there a way to navigate markets, especially when they go through such roller-coaster rides? There are no right answers here unfortunately, but what one can do is use such opportunities to go back to basics. The below three strategies should hopefully shed some light on how one can manage one’s portfolio more effectively during such times
Book profits for short-term goals
Markets are within touching distance of pre-COVID levels, while the economy is still struggling, and a sustained recovery to earlier pre-2018 levels seems quite some time away. Valuation is always a subjective area, and depending on the lens (bias) you have, you will end up finding the answer you are looking for.
Therefore, it is always a good time to use interim market highs to book profits towards any goals that are short-term in nature. So, use this opportunity to check how well all your goals less than 3-4 years away are funded, and whether you need any surplus amounts. E.g., any children education needs, a prepayment that you wish to make on an existing loan or even a long-awaited vacation. Withdraw your requirements from equity and move into safe debt at this time.
Rebalance for your optimal asset allocation
Every plan, on the basis of its underlying goals as well as risk profile of the investor, ends up arriving at an optimal asset allocation. E.g., for a middle-years couple in their early 40s, major goals such as retirement, children’s overseas education, upgrade to new house/car, foreign vacation, etc. will still be many years away. The optimum asset allocation that the plan may arrive at could be something like 70:30, in favour of equity.
On the other hand, for a couple who have just retired, their family goals are usually either taken care of or just about getting fulfilled, and the key goals ahead are retirement, and fulfilling their bucket list. In such a case, the optimum asset allocation that the plan may arrive at could be something like 45:55, in favour of debt.
Market surges such as the recent one would cause asset allocations to become skewed, and such times make for good opportunities to reset the portfolio towards its optimal asset allocation through rebalancing. So in the above two cases, in well-planned portfolios, the current asset allocation would look more like 80:20 or 55:45, and this would be a good time to therefore move some part of the portfolio from equity into debt through re-balancing.
Make your portfolio future-focused
Lastly, it is possible that your short-term goals are well-funded and your portfolio is also well-balanced. That said, most customer portfolios usually end up always carrying some laggards that were either bad investments in the first place, or have lost their edge due to market events (e.g., the current crisis has severely impacted some industries such as theatres, airlines, hotels, holiday planners, etc.).
Most customers are usually averse to selling investments at a loss, and would rather wait “until the principal is recovered.” Thankfully, as a popular quote goes, “A rising tide lifts all boats” and market jumps like these give investors opportunities, to exit not-so-good investments at a good price. So, use such times to identify such laggards in your portfolio and discard them, and make your portfolio more future-aligned.
Such times are also when the lack of a road-map makes investors complacent, and they end up either jumping in when it’s late or investing into something that’s not suitable. Use the above three strategies to guide you towards the right actions when markets rise, and you can be sure that they will give you both – profits when you need them, and peace-of-mind as you pass through such market volatility, secure in the fact that you have taken the right steps to future-proof your portfolio.
(The writer is a financial planner and NISM-certified investment advisor, and co-founder of Finwise Personal Finance Solutions)