SENSEX See-Saw

Greetings from PenguWIN:

I presume you are aware of the volatility and battering of stocks in the Indian Equity markets.

Experts attribute this carnage to a variety of reasons including Rupee depreciation, continuous increase of Crude oil price, build-up of Non-Performing Assets (NPAs), Global trade war, bank frauds, rise in bond yields, high valuation of Small and Mid-Cap stocks, Mutual Funds Recategorization and introduction of long-term capital gains tax.

Investors who started investing in Equity markets in the last couple of years and have seen their portfolio value go up significantly, have experienced the first shock of their Equity investment. Advising them on bringing in only the long-term money (5+ years for 100% equity exposure and 4 years for 65% equity exposure through MFs), align investment to financial goals, condition them to be prepared for 20%+ market falls (2008 is a different story altogether) will face the acid test now. Investors who started working with PenguWIN for over 3 years have witnessed couple of situations like this in the past and will be able to withstand the shock relatively better.

Though the key market Indices Sensex 30 and Nifty 50, have changed only a little (courtesy the weight of giant stocks like Reliance, TCS, HDFC, HDFC Bank) Small and Midcap stocks have taken a huge beating.

So, the question that comes to everyone’s mind is should we really need to worry whenever market takes huge hits?

• First and foremost, stop looking at your portfolio on a daily, weekly or monthly basis. It’s like buying a house for 1 crore to live and keeping an eye on price movements. Please remember that whether the value goes up by 10% (1.1 Crore) or falls by 10% (90 Lakhs), it is of no consequence as you are not going to sell it (at a profit or loss) and start looking for another house. Similarly, the interim portfolio values are notional numbers and do not read too much into it. Disciplined and patient investment will be adequately rewarded by markets and I have personally experienced this. Some of you may think as “how do I know if my fund/portfolio is performing well?” Well, that is the reason why we exist and you can be assured that you are in safe hands.

• Well, if the next question is “how can we expect PenguWIN to keep a track on all investors portfolio?” That’s true, but I have answered this in the past and reiterate it once again. My personal portfolio is extremely complex and I have kept it that way to ensure that almost all equity funds that we prescribe finds a place. Whenever I look at my portfolio, mostly once in 2 days, I keep a track on changes that a fund has undergone like stock or sector specific bet going wrong, change in fund manager, change in fundamental attributes, change in CIOs (chief investment officer).

• Market falls happen all the time during the equity investment journey. It has happened in the past, it’s happening now and will happen in future too. This is the premium that we have to pay for the superior returns that equities generate. No pain, No gain.

• Markets have been positive for about 75% of the time and negative for only the rest 25%. Equity market gains are never linear (like fixed deposits and other Fixed income instruments) and gains accrue in very short periods. Investment approach varies when you directly buy and sell shares vis-a-vis Mutual Fund based approach. Booking profits and trying to re-enter at attractive price points don’t work for Mutual Funds (Fund Manager has the responsibility). It has been proven many a times, when a fund manager attempts to cut the losses, hold cash and waits in side-lines trying to predict the market upturn to re-enter, has been a poor strategy and a few popular fund managers who tried to practice this approach have been exited from the MF Industry.

• It might sound a little harsh for a few (that I am already sitting on losses), but the market provides excellent opportunities like this to deploy lump-sums. A few investors have had discussions with me on this. You could do this only if you have accumulated cash that is not required for the next 5 years. Else, stick to systematic investing. The worst thing that an investor can do in a downward market is trying to sell and move out. So, please refrain from that. If you think your risk appetite is less and can’t withstand 20 to 25% losses, then once the markets are up (no one knows when though), we can discuss and try to alter the asset allocation i.e. increasing fixed income proportion and reduce equity.

• Lastly, financial goal definition and tracking is extremely critical. What happens when there is a market fall in the year of your goal? We need to categorize the financial goals into negotiable and non-negotiable.

If you have a goal of trying to buy a new house in 5 years and wanted to invest for that, you start moving funds from equity to fixed income before specific time horizons and not the week or month you need the corpus for buying. We need to balance the attractive returns that equities provide vs safety and below average returns (mostly negative net of taxes and retail Inflation) that fixed income instruments provide. In the case of a new house, if you can afford to wait a little more time (negotiable goal) then we could try to leverage the equity returns better. But for a goal like daughters or sons higher education or retirement (non-negotiable), we have no leeway and some gains need to be compromised

“Stock markets almost follow Pareto Principle:

20% of the efforts lead to 80% of results. In the past 18 years markets were down for 43 months (and up for 173 months) of the total time frame of 216 months i.s. 20% of the time. Fall is always faster due to negative news flows"

<Blog # PenguWIN 1062 – SENSEX See-Saw>