It has been a bad year in equities for everyone. Stock prices started falling since Jan’18 immediately after annual budget. There was a little respite in between but again recent round of correction has broken the backbone of most portfolios & demats. In such market conditions, stock quality goes for a toss as bears will not spare anyone, the good, the bad or the ugly.
Naturally as an investor, we are all worried and there are a lot of queries clouding our mind. Sensing that, today’s AI Post is focused on addressing frequently asked questions (FAQs) from investor community under current market conditions. Trust this helps!
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FAQ 1: Market is crashing and finance companies are failing. There is chaos everywhere, are we staring at 2008 kind of crisis?
AI: While it is true that stocks have fallen a lot this year, comparing it with 2008 will not be correct. 2008 was a lifetime kind of correction for equity market. In the below graph you can see that Sensex nosedived by almost 57% while small cap index plunged by almost 80%. This is mayhem and real meltdown. Imagine a person’s wealth getting shrinked from Rs 1Lakh to Rs 20k. In comparison, 2018 correction is not as bad, though arguably it is the second worst patch of performance in Indian equities since 2008.
In 2008, lot of people pulled out of equity market, never to invest again. Many equity related businesses and advisors were forced to shut shop due to extremely low investor interest. 2018 is certainly not 2008. Nevertheless, pain is a pain more or less. So, ongoing correction is going to hurt you but this is not the worst equities can inflict upon you. So if you want to remain in equities, build a strong stomach to digest volatility for years. There are no easy methods here but all this pain is worth it if you successfully ride this tide.
FAQ 2: What do you think, market will do from here?
AI: This is the most common question, many advisors are asked. The simple answer is No, I don’t know. There is no method to accurately determine which way market is headed in coming days. Investors and analysts are not astrologers and we should not try to become one. Overconfidence in equities will surely backfire sooner or later. Generally, people are predicting that market will remain like this till general elections. This is again a speculation. The problem with speculators is that they will keep on changing their predictions till the time they arrive at the correct one. If you would have asked a speculator in Dec’17, which way the market will go, no one would have predicted that it will crash within next 30 days. So predicting market direction in short term is futile. People who do so are usually overconfident on their skills. Overconfidence is the favorite food of Mr. Market. If he sees it, be sure he will eat it the soonest 🙂
FAQ 3: What should I do? Buy more or sell or do nothing?
AI: It depends upon the type of stock you are holding. For every stock, you must know why you bought it for the first time. If you still don’t know, better to sell it and deploy leftover cash into quality stocks which are available at discounts. You will be compensated for your loss in the long run. If you are sure of why you bought that stock, validate your assumptions and if it is worth it, go ahead and buy in phases. May be buy a few shares every month or quarter in your top conviction stocks.
Do not dip fresh biscuit to recover your sunk biscuit inside the tea cup. Odds are high that fresh biscuit will also get spoiled to recover the old one.
FAQ 4: This is not the right time to invest, I will wait for market to recover.
AI: Worst mistake, please don’t do so. No one can time the market including experts. Bull markets are not the best time to invest rather bear market is. Alas, most investors do exactly opposite. If you have surplus money then you should start buying quality stocks bit by bit. Usually quality stocks will be the first one to recover from lower levels once correction is over. The problem is that there will be no announcement that market correction is over and you can come & invest. Usually by the time you will come to know of correction is over, quality stocks will be already up.
FAQ 5: I am a new investor, want to invest some money into equities. Tell me how much shall I invest?
AI: Well, this question keeps on coming, irrespective of market conditions. It is very difficult for a stock advisor to tell you how much you should invest into a stock. This question itself makes no sense as this can only be explained by a financial planner not by a stock advisor. It is similar to asking for a cancer medicine from a pharmacist. No matter how qualified a pharmacist is, his job is to supply right kind of medicine within valid expiry dates. He does not know if you need a cancer medicine or a blood pressure one. A financial planner is like a doctor who will look into your income patterns, saving abilities, your goals, liabilities and aspirations in life along with your risk taking ability to come up with investment allocations across various asset classes like debt, equity or gold. The role of financial planner is very personal in nature, while the role of a stock advisor is not personal, he or she will advise within one asset class which is equity. Whether the risks associated with equity matches with your requirements is something you need to figure out.
FAQ 6: How long this correction will last?
AI: We can’t answer this with certainty, it may continue for some time or we may see some recovery. Predicting trend over short term is very difficult. However, we can ensure you that over long term, market will be up from here. This is the reason why equity is considered as a long term investment since there are lot of uncertainties in short term.
FAQ 7: What is causing this downfall?
AI: The simple answer is, law of average. Complex answer is as follows. Markets were trading at historic levels from quite long time and correction was bound to happen. Similarly, after this correction, upswing is also bound to happen. Market will find a reason or excuse to move up or down if it has to. For now there are reasons like crude oil, weak rupee, election year etc. Earlier the concerns were corporate earnings. Now earnings are back on track so reason has changed. In an economy things moves in cycles and they are inter-related. Currently, we are moving from the bottom to the top of interest rate cycle. Inflation will follow and earnings will also follow. Infact, Indian GDP numbers are already hinting towards sunrise in the east while we are busy staring at the dark skies in the west. Once this cycle peaks, things will get reversed and market behaves accordingly. So whether you call it market cycle or law of average, it is one and the same thing. Only the extent to which these cycles go deeper into downward or higher into upward journey, the lobes of the cycle will differ each time and thus resulting into a different equity returns for different economies. For developing countries like India with demographic advantages, the gains will be greater and longer than the losses which will be sharp but shorter. Thus, creating great value for market participants over long term.
With this, we end our FAQ article for today. If you have any more queries, reach out to us, we will be happy to resolve.
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