Covid19 – An unseen demon
If Covid19 was produced into a movie, you can easily visualize that the bad guy’s wage this Biological warfare against human-mankind to take complete control of the world; with the world struggling or fighting to find an antidote. Until the world finds an answer to the problem, it is forced to hide away from this pandemic causing virus, bringing the entire world on its knees or a lockdown scenario. We could not have ever imagined that the world will ever have to go under a lockdown scenario – a reality now?
It is relatively easy to fight a known devil (or even a war against two nations), because one clearly knows and can see the enemy. This war is against an unknown enemy and without an antidote, our survival is at risk; staying in-house could be the best solution to save a life.
The uncertainty of the post-pandemic effect makes the Future Tense.
The fast spread of the virus and its deadly impact got the world to a halting stop. The financial markets derive it’s value by making a fair estimate of the future earnings. The current scenario not only dents the possible future earnings but causes severe dent to the balance sheets of Governments, Corporate Houses and also Individuals (i.e. Job Loss, Salary Cuts and Poor employment generation), making it extremely difficult to actually guess-estimate the exact loss – Financial markets hate uncertainty.
The financial markets react by triggering the flight to safety mode, selling the riskier assets very aggressively. The Indian stock-markets were not spared either, the Sensex/ Nifty corrected sharply, leaving everyone worried. The Individual stock story of the broader market will reveal a much dangerous horror story (with many stocks at almost 50% down from their 52 weeks High prices), having said that few sectors such as Healthcare, Pharma and Communications have been clear beneficiaries. The Individual stocks have seen much higher degree of volatility and mortality during these times.
The Equity Mutual Fund portfolios weren’t insulated either, they too saw the decline but the hit had much better shock absorption, with funds falling between 15% to 20% compared to much higher brutality that the individual stocks faced.
Many investors have a common question, should I continue my SIP or should I pause? Is it the right time to Invest?
Experience is a big teacher
Before I answer the above questions, let me segregate the investor community based on when they started to invest?
Investors who have earlier experienced the correction during The Sub-Prime crisis of 2008 and have seen the equity market crash by almost 50% and then recover are far more under control. They are surely worried but are not at a panic stage. Many people during the 2008 crisis did the mistake of exiting and missed a great earning opportunity to create wealth. Those are the people who are asking “Is it the right time to Invest?”. These are the people who do not want to repeat their mistakes and on the contrary take advantage of the Investment opportunity that lies ahead.
However, investors who started investing say after 2010 onwards and have witnessed such corrections earlier are reacting very differently. They are the ones who are in a panic stage, and if the amygdala in your brain fires then it is very difficult to calm down the mind. These people are the ones who are either exiting the investments, stopping their SIP or ask should I continue or stop the existing #SIP?
Markets are irrational
The theory of efficient market hypothesis is very much a theory; in reality the markets are never rationale. They pass through phases of high exuberance where the highs are intoxicatingly high and the lows are abysmally low.
History have enough evidence to suggest that markets go down only to rise to greater glory, much greater profits – whether it was The World War II, The Tech Bubble Burst, or The 2008 Sub – Prime crisis and now the pandemic Covid-19.
Smart investors benefit from this irrationality
It is humanely impossible to predict at this juncture to what extent the economy will get affected and how long will it take for it to revive, having said that I would like to leave you with few points that will aid you to either decide.
- Low valuations – The stock market fears bring down the valuations of good companies as well. These kinds of low valuations are not available during any normal situation. It will always arise on account of a crisis, but these companies are strong enough to ride through the crisis and emerge victorious. Low valuations are never available perpetually. Make hay while the Sun shines.
- Check Emotions – All great investors have much better control of their investment behaviour by keeping their emotions under check. Markets have always created wealth it is our emotions that destroy wealth.
It is difficult to predict the exact bottom of the stock market, hence investing at these market valuation levels, with a little longer-term perspective can surely create significant long term wealth.
SIP must be continued at all times and it is when the markets have passing through very high valuations level, you can book profit. The exact opposite corollary holds good during bad times, you should not only continue your SIP but if possible, increase your allocation in such bad times to make most of your money.
If your goals are maturing in the near future then it needs to be managed differently, you can seek our help. The qualified team of Fincart can hand-hold & navigate you safely to your destination.