Do you remember the good old days of the last market crash?
Yes, the days of the more than 50% market crash are being called the good old days.
Let’s see why.
There are two kinds of investors.
If we were to sum each type up in one word, you could differentiate between them as Hot and Cold.
This kind is very involved in the market. They follow the Sensex or the Nifty almost daily, they’re on the ball, they track their investments, they focus on what people are saying. They are totally up to date on the latest news. They make investment decisions based on a lot of input, never unaware of what’s being said on CNBC and MoneyControl. They follow expert views, sometimes becoming experts themselves. They live and breathe the markets.
This kind is not very involved in the markets. They don’t often look at benchmark indices. They invest and keep investing not worrying about timing the market. As a result they sometimes miss out on opportune investment moments. They are not always aware of what TV and newspaper experts are recommending. They rarely become experts. They follow very basic investments rules.
(Read our article on Different Types of Risk, The Iron Stomach Test and the Golden Investing Rule - Part I and Part II)
Generally, Cold Investors generate higher returns on their investments.
Do you see why?
A Hot investor gets very involved, even emotionally, in the ups and downs of the markets.
Cold investors don’t really care about the markets, but they do care about returns.
A typical cold investor’s reaction to the 8,000 Sensex crash would have been to continue buying. If he (or she) had a Systematic Investment Plan, they would have simply continued it. If they had the investible surplus, they would (and we have real evidence of people who did) buy more at every fall.
A hot investor would likely have listened to TV and finance website experts saying that the Sensex was going to fall further to 6,000 levels. He would have likely stopped all his investments, or even worse, pulled out in various stages as the markets fell.
Cold Investors remember the golden investing rule:
Buy Low, Sell High.
In times of stress this is the one rule that will save your investments and generate the kind of returns that will really build wealth. But it isn’t always easy to become a cold investor. After all, you invest your hard earned money and you don’t want to see it fall. It can make you uncomfortable, worried and cause high levels of stress and even fear. What if this is money you can’t afford to lose? You need to be careful! It’s not all black and white after all.
So here’s how you do it.
There are some things you need to know, because you might need to rethink your portfolio now:
How Does This Apply to You Now, Dear Reader?
- Less than 3 years = 100% debt investments
If you don’t have at least a 3 to 5 year horizon, don’t get into equity.
Were you one of the people who invested at 20,000 levels? Your money, if it’s still invested, is still in the red most likely. It’s been more than 3 years since the crash. So follow the time horizon rule. If you have 3 years until you need the money, go only into debt investments. If you have 5 years, you can have some equity exposure, but try and limit it to less than 35%. As your time horizon increases, your equity exposure can increase. If you have 10 years until you need this money, you can go up to 85% into equity.
(Read our article on How to Position Your Debt Portfolio for Smart Gains)
- Diversify, Diversify, Diversify
Another lesson from the 2008 crash was this - diversification can make you a lot of money.
When equity markets went into their spectacular free fall, gold - the evergreen hedge against inflation and savior in times of uncertainty - went through the roof. Debt mutual funds? Also excellent when equity was falling.
PFN investors (keeping their life goals and time horizons in mind) are typically diversified across all 3 asset classes - equity, debt and gold - in their own personalized proportions based on their Financial Plans. These guys made money on debt and gold, and continued their SIPs while markets fell. Now that were at 17,000 levels, they’re sitting pretty on some very nice returns across all 3 asset classes.
(Read our article on 4 Investment Myths Busted)
- Be Disciplined, Not Emotional
If you have an SIP, you started it for a reason.
Maybe you are a salaried person and hence you have investible surplus on a monthly basis rather than as a lump sum. This is great, but you must understand the advantage of your situation. By being forced (if that is the right word) to start an SIP, you are disciplining yourself to make regular investments. SIPs will average out your purchase price, they ensure you invest regularly, and most importantly, they help you take advantage of market volatility.
When the Sensex crashed in 2008, PFN investors reacted in both Hot and Cold ways. Some investors stopped their SIPs, convinced that the equity markets were done for, or that they would fall even lower. They attempted market timing, or simply lost faith in our country’s growth altogether.
Cold investors continued investing. They made more money.
(Read our article on Why You Should Adopt the SIP Route)
We’re not out of the woods yet. Anybody who tells you that things are going to be hunky dory is either very optimistic, or has access to hard numbers on global economies that the rest of the world does not.
Combine this with one other very important fact. India’s economy is not as delinked as we’d like it to be. In 2008, when the US economy fell, India fell by almost the exact same percentage. If the western world faces trouble, it will have a domino effect on developing nations, primarily by way of FII flows.
Not only this, but our country is in dire need of policy reform. Infrastructure troubles and bureaucratic red tape, not to mention retrospectively changing tax laws, can make a country seem like an unfriendly place to put your money.
It is important to understand that while things will get better, you need to also prepare learn how to financially handle the current situation. There are ways to build wealth in these times, and the good thing is these ways are simple and time tested. Be disciplined, invest via SIPs, diversify and remember the time horizon rule for your life goals. That’s all that cold investors did in 2008 and it worked like a charm. And that’s all you need to do now.
To build your Financial Plan, Call PFN Now at (022) 6136 1200.
We’re here to help Grow Your Wealth and Achieve Your Life Goals.