PERSONALISED INVESTMENT MANAGERS

When Markets correct, do you stop or continue to Invest?

15 June, 2021


          
            When Markets correct, do you stop or continue to Invest?

Movement is second nature to the Markets – be it up or down. Stock Markets will always be turbulent. Black Swan events will occur causing shock, fear and panic. It is never about ‘IF’ it will happen. It is about ‘WHEN’ it will happen. Every time, the cause of such a shock is different. COVID 19 shocked us all in 2020. And we can never predict ‘when’ this will happen again. But all we can do is mentally be prepared not to get caught in the greed & euphoria versus fear & panic cycle.

Success and Life are never linear. And the ride of life will always be bumpy. Our ancient wisdom talks about life being all about disciplined action or Yoga i.e. doing something properly or correctly . But ‘Yoga’ has to be complimented with ‘Kshema’ or consolidation for it to be effective. Only then can success or a state of ‘Zen’ be achieved.

The most disciplined method of investing into equities, which ensure we don’t bring in our emotions when markets are turbulent are the Systematic Investment Plans or SIPs. SIPs help us afford savings, especially for the salaried individual.


The Covid 19 Crash

Let us look at COVID 19 as a case study. It led to a lockdown which may have caused reduction in salary, loss of job, stoppage of business as usual, lower revenues overall, etc. In such cases, it felt intuitive to stop the SIPs and focus on covering current expenses and other issues on hand rather than continue investing. However, if investors could have continued the SIPs, they should have done so without any hesitation, taken advantage of market volatility to invest during lower market levels. This would have helped them average their buying at lower levels.

But the average investor who was taken in by the fear stopped investing and concentrated on conserving cash during COVID 19

Market volatility and emotional volatility go hand in hand. Our emotions make us try to ‘time’ the market. We sell when we panic or buy too much when we are excited or euphoric. Only disciplined, patient and long-term investors are rewarded by the market. We must always remember that it is important to stick to our financial plan and asset allocation and avoid allowing emotions to come in the way for financial success.

Let us look at this by studying 2 Emotional Scenarios over a three period with the most significant period being the COVID 19 year (2020) (*SIP investment plan invested in the Sensex from December 2017 till December 2020):

Below are graphs showing returns in both the above scenarios:

Scenario 1

Remain disciplined and continue SIPs with discipline throughout COVID period (after March, 2020)

Scenario 2

Panic and stop SIPS during the COVID 19 market crash after March, 2020), but hold on to investments.

Kshema’ or consolidation is key to success. And consolidation may also mean ‘going down’ or a ‘market correction’. It is this process that ensures a higher level of stability over time. This understanding is very important for us to achieve a higher level of success. This understanding is further exemplified in The Zen Principle of Dynamic Balance for sustainable success.

Continuing to invest in equities led to higher returns over the long term (+ 3 % per annum higher returns). This phenomenon of higher returns can clearly be seen in investments made in other indices too:

It is very difficult and dare we say, impossible to ’time’ the market on both sides – up and down unless you are a soothsayer. Trying to ‘time’ the market causes huge losses and loss of investment opportunity. Fear and euphoria are both emotions which lead to selling or buying without discipline causing a loss to wealth creation.

If an investor has the ability to continue SIPs and add more money during a market crash like COVID 19, he would be in the best position to reap maximum benefits. In keeping with the earlier example of Yoga Kshema from the Vedanta, we realize that consolidation is a natural progression from acquiring. And consolidation always happens at a corrected level. Just like when you are climbing a mountain, you attain a height, but then you have to come down to acclimatize your body before climbing further. There is always a consolidation that takes place at different levels before equities climb further. Mountain climbing understands the great importance of ‘Kshema’ or consolidation before soaring to greater heights.


“Be fearful when others are greedy and be greedy only when others are fearful.”

- Warren Buffet



Conclusion:

The best solution for financial success is to remain disciplined and continue your investments as per your financial plan and asset allocation. If you are a new investor in the market, always remember there is a time scale to everything. The child becomes a sprinter only over time. A hunter becomes a conservationist only after he realizes the damage to the ecology caused by the hunting, and a trader becomes the investor only when he realizes that there is potential in staying invested over the long term rather than cashing out gains in the short term.

To be truly successful, your financial planner should be experienced enough to know how to best take advantage of the troughs and peaks in the market, Know More.

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