Sachin Tendulkar out for a duck! Does that make him a bad player? A majority of us would say, 'No'. But when it comes to equity investments, one bad year, bad innings or a loss and majority of us are out of the investment mood. Worse, we feel like never investing in equities again.
But there is another way to view this, just as Sachin's long-term average is excellent, so is the long-term average of equities (stocks) as an asset class globally.
For instance, if you had put in money aside (not referring to betting here) for every Sachin match in the last 15 years of his career and similarly at the same time if you had put money in equities instead of trying to time the market, then the results would have been excellent and you would have been laughing your way to the bank.
The markets are volatile but it's the rational investor who will reap the rewards of this volatile period. The dance of stock prices and NAVs (net asset values of mutual funds) might be seductive, but it does you no good besides giving you a higher level of anxiety.
I am confident this is not why you invest and the few good reasons to invest are to achieve your goals, protect the purchasing power of your money, grow your wealth and leave a legacy for the next generation.
Here are five key ways on how you could cope with market volatility. By following these, we can keep an eye on the bigger picture and ensure that you don't lose sight of long-term goals.
1. Don't panic
It's very tempting to 'throw in the towel' and sell investments. In reality, that is most likely to be the exact moment to buy more. When everybody is selling, you should be buying. Intellectually, we know that, but emotionally, it's difficult. However, it's important to override our emotions and do what is in our best interest.
If you feel constantly worried about the ups and downs of the market, I would suggest taking a walk on the beach and spending some time introspecting, reflecting on issues that are important to you. If that does not help, then one can always go and seek help of a qualified financial advisor.
If that too does not help, park your money in FDs (fixed deposits), bonds, Postal schemes or under a mattress and hope that it will reap enough to protect your lifestyle, post inflation and taxes.
2. Invest regularly
The stock market is the only place where people buy less when it 'is on sale.' The markets will, of course, come back. And the best way to take advantage of this is to invest regularly, in a systematic manner in various investments, so that one can automatically buy when the market dips.
3. Control expectations
We cannot control how the markets behave but we can control how we behave and our expectations of it. World over, equities as an asset class has given around 6-7% returns ahead of inflation, which is around 12 % assuming an inflation of 6 %.
Although it cannot be said what returns to expect in the next 6 months to a year, equities have the potential to deliver reasonable rates of 12% over the next 10, 20 and 30 years. No doubt that there will be down turns in some periods but long-term averages can comfortably be around 12 %.
4. Understand the realities of capital markets
The stock market is not a place where you can make a quick buck like the people who bet on matches and horse races. Just like 99 % of the gamblers lose, so will you if you do not adopt a disciplined approach to investing, have reasonable expectations from your investments, and do not understand the risks you are taking. Futures & Options might sound tantalizing but losses can be 100% here.
As a rule, any money that you may need in 1-2 years should not be invested in equity and at the same time, any money that you do not need for the next 15-20 years should be invested only in equity.
Do not let your emotional interests override your economic interests. The key lies in identifying Sachin Tendulkar when it comes to investments and having a control on your emotions.
5. This too will pass
Always keep an eye on the bigger picture. We are living in times when India is displaying great economic prosperity. Favourable demographics, outsourcing, consumption, innovation, and political stability to a certain extent will continue to enhance the standard of living throughout India. This will keep the economy growing, profits increasing, and that will eventually get reflected in higher stock prices.
Charles Ellis noted, 'Stay invested through the rough times. That's the only sane way to be there so you will enjoy the great and good times.'
The lesson to be learnt is, 'Don't let short-term performances of equities determine its long-term average.'
The author is a practising Certified Financial Planner and runs 'My Financial Advisor' www.myfinad.com. He can be reached at amar.pandit@moneycontrol.com.
For more on mutual funds, log on to www.moneycontrol.com.
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