Stock Markets: Fast and Furious

Exit poll results have already brought great cheer to the market, all eyes are on the 16th of May, 2014 when the election results will be out. As an investor it is possible that you might be overwhelmed by this excitement of the markets touching record highs. But one needs to understand how long will this excitement last. Read on to know if you, as a disciplined investor, should really move with the market?

The markets have hit record highs; crossing the 24,000 levels on 13th May, 2014 and closed at a new all-time high of 23,871 points (as on 13th May, 2014). An expected reaction to this might be to book profits from this rally. But disciplined investors do just the opposite. They don't panic or get overwhelmed when the market swings and keep holding onto their investments. They avoid taking any short term measures which could damage their portfolio in the long run.

Market reactions to election results:

From the table it can be concluded that the initial reaction of the market after the election results are no indicator of the stock market performance over the next five years of that government’s tenure. Stock markets performance over the long term depends on the development activities pursued by the government at the center. For e.g: in 1999-2004, the stock markets took favorable note of the new sworn in government with markets going up by 6% over the next two days of the results. But, over the entire term of that government, it just went up by 15% over the five year period.

However, in 2004, markets disliked the election outcome and initially prices tanked by -17% over the two days following the election results. But during the term of the government there was a return of 125%.

In 2009, markets hit circuit breakers, shooting up by 17% over the course of two days post the election result. However, over the entire term of the government it just went up by 84%. Large part of the gains has come over the last six months and many view these gains on growing optimism in anticipation of a stable government. If we were to deduct these gains and measure the market’s performance until August 2013 when markets were struggling amidst the political despair, the performance over the governments tenure would have dropped to just 43% over the five year period. This means that 17% of performance in the first two days and for the remaining until August 2013 it added just another 26% over the five year period.

This shows that your investments should not be influenced by election results but by financial prudence. Moreover, your investments should be goal driven and it is advised not to get carried away by market movements; you should rather hold on to your investments for the long run.

Market movements cannot be predicted, but here are some tips may help you to make sensible investment decisions:

Set your investment strategy

Surviving in market volatility is lot easier when you have a firm investment strategy. To create a sound investment strategy, you should understand several crucial factors, which are:

• Your investment goals: You should set your financial goals for which you want to invest.
• Your time horizon for investments: The time period for which you want to invest depending on your investments goals.
• Your tolerance for risk:

You should also gauge your risk appetite i.e. the amount of risk you are ready to take.

Have a financial plan

Having a financial plan helps you deal with a volatile market in a much better way. A financial plan includes the following steps:
•  Set and prioritize your life goals.
•  Check your existing investments and the role they will play in meeting your goals and also whether the current set of investments are the right ones for you.
•  Identify the right investment instruments including how much insurance and a emergency reserve should you have to take care of your dependents.
•  Track and review your investments.

Do not time the market

It is advised to stay invested in the scheme and not redeem during the market crash and again invest when the markets go up because keeping track of the market and individual stocks is very a difficult job as it requires a lot of time, research and financial expertise to time the market correctly. Not all people are blessed with these abilities and face a high probability to face losses. It may happen that sometime you become over confident and take too many risks and lose your money or become overcautious and miss an opportunity.

Diversify your portfolio

Your focus should be on diversifying your portfolio to protect yourself from market volatility and market downturns. Diversification is spreading your investments across the three asset classes i.e. equity, debt and gold. Then, to help offset risk even more, diversify the investments within each asset class. Keep in mind, however, that diversification doesn’t ensure a profit or guarantee against loss.

Invest through Systematic Investment Plan (SIP)

A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investors save regularly. Systematic Investment Plans are recommended as one of the best way for investments in the volatile markets. With the power of “Rupee Cost Averaging", SIPs have the potential to minimize losses and generate returns. An SIP may ensure disciplined investment irrespective of the market movement. You can invest in equities through mutual funds for as low as Rs 500 a month. That is the wonder of Systematic Investment Plans - Invest big through small savings. Investing through the SIP route helps you make regular investments at regular intervals and can help you gain from the benefit of compounding.

Rebalance your portfolio

At times when the market is volatile, its best to review your portfolio i.e. to check the performance of the funds in your portfolio and their exposure to risk. Be sure that you are not too over exposed to one particular sector. Some small adjustments in your portfolio might help you to give you long term profits.

You can survive the volatile markets if you are on track to meet your investment goals. Therefore, it is advised not to flow with the sentiments of the market during a market fluctuation and rather than focusing on the instability of the market you should focus more on how to develop a sound financial plan which will help you fight against the market volatility. However we strongly suggest you to consult with your financial advisor before proceeding with any investment decision.

Above article is authored by Quantum.

View All