Markets have recently been gyrating wildly between rallies and sharp drops. We haven’t seen any real growth since the highs seen in 2021. Does it signify the start of a bear rally?
There are many genuine concerns. The global economy is heading towards a deeper recession. The central banks in Europe and the US are increasing interest rates to control high inflation in their economies. Plus, the war in Ukraine will likely last much longer than many envisaged.
Even in India, RBI recently increased interest rates to control sticky inflation. So far, the Indian stock market has continued to outperform other stock indices, but then there are concerns over its higher valuations and economic growth rates. Stock prices of some outward-looking industries like technology have already taken a beating, with apprehensions over cuts in IT spending.
What should investors do now?
Here are some steps:
Assess your finances
If the money situation is tight or you have not yet put up an emergency fund, hold off on further investing. Some industries, especially the tech industry, are witnessing a bit of employee churn. It is better to assess your financial situation before committing more investments.
Also, given the volatility in the equity market and the high chances of global recession setting in, it’s likely that your portfolio might be in the red when you are approaching your financial goal. If the goal is just a few years away, shift totally into debt. Equities need an investment horizon of at least 5-7 years.
The stock market would continue to be unpredictable over the short term. Even experts do not know where they are headed in the short run. So, invest only money that you wouldn’t need in the foreseeable future.
Don’t get greedy
The stock market saw multiple short rallies in the past few months. Many investors regret missing the bus. They now want to invest more into equities to make up for it and in lump sums.
Such investment strategies could backfire. After all, the stock market might correct over the short term. While eventually, the way is up for stock markets, taking undue risks on one’s investment portfolio can jeopardise one’s achievement of goals.
So, stick to your asset allocation strategies. If you are higher on equities than what your asset allocation strategy permits, it’s time to prune the equity component back to the intended level.
Believe in equities
With interest rates inching up, and fixed deposit rates going up, some investors are taking the safer route of debt. While debt is safer, it is also important to know that consumer inflation is also high. Over the long term, the equity asset class has the best potential to give an inflation-beating return on your portfolio.
Various past events have roiled the market – be it COVID, demonetization, the financial crisis of 2007-08, the Kargil war and so on. Yet, it has bounced back to give patient investors 10-12% annual returns. So, believe in the power of equities and have a long-term orientation.
Stick to large-caps
When the going gets tough, the tough get going. All categories of investors need to have an element of large-cap funds in their portfolio. From first-time investors to those seeking to create long-term wealth, large-cap funds provide the necessary stability, diversification, and the potential to earn inflation-beating returns.
They are usually leaders in their business with a strong ability to withstand economic and geopolitical shocks. While their revenue growth might not keep pace with that of mid-sized companies (thanks to their already large revenues) such companies are highly profitable. Strong leadership position has given these companies higher pricing power or customer loyalty, resulting in higher profitability.
Large-cap companies have proved to be the best bet during weak phases of the market. While giving downside protection, such companies have also stacked up well on returns.
Stagger your investments to average out your costs. If you have a lumpsum amount, invest it over a year. Even if the market corrects, you will end up averaging out the costs.
Retail investors should largely use the systematic investment route to investing. By doing that, they don’t have to worry about timing the market. More importantly, continue with SIP even when the markets are on their way down.
Short-term market correction should not worry long-term equity investors. They should continue investing as markets would eventually recover and give promising returns.
This article was first published on CNBC TV18 here on 20th Feb 2023.