Sensex is where it was some 7 months ago. We have escalating war on one side and growing inflation on the other side as no nation is immune to the ill effects of loose monetary policy and facing the after effects of stringent COVID restrictions. Sri Lanka is defaulting on its external debt. A nation default on its debt obligation is such a bad news. None of these are good signs and yet the stock market is happily moving forward. What should an investor to do in this situation? The answer may not be quite as exciting as one would think. It is quite boring and you probably already know what I am going to say. Just stay the course, follow your goals, maintain your asset allocation blah blah.
Let me continue my ramblings about the economy a little bit more. While inflation in India has not been too bad as compared to the US, we have passed the threshold of 6%. And that 6% is at the wrong end of the RBI’s self mandated inflation band of 2% to 6%. If RBI fails to meet the inflation targets for 3 consecutive quarters, it is expected to give an explanation to the government on why it failed. While RBI failed to meet the inflation target for the last 3 consecutive quarters, they got a free pass this time from the Indian government circumventing the law.
As a consequence RBI did not have to raise the interest rates which would have disturbed the market. They might have escaped this time, but come next policy meet, they may have to increase the rate. So the market already knows that and has priced it into the valuations. Yet there was no fall in the index. The earnings report season has just started and we will know how businesses did last quarter. May be that will have some impact on the market. So knowing what you know so far, which are the geopolitical issues, more inflation and probable rate hike, you expect good opportunities. Now, should you change your strategy to your advantage? Absolutely not.
If one keeps changing their strategy for every market situation their portfolio is will end up in a mess. Moreover, it is extremely difficult to predict the market. My suggestion is that you first figure out what type of an investor you are. Then just stick to the plan unless you decide change to a different type of investor. The change will only happen when you have acquired more knowledge or experience. So you can’t be changing from one type of an investor to the other every year for example. So what are the different types of investors?
Well there may be many different variations, for example, you could a person who has an asset allocation in mind based on a goal. You could be a person who diligently invests X amount every month on the same day without looking at the market conditions. Or you could be like me who has a rule-based tactical strategy, changing asset allocation depending on the rules and situations. Or you could be the type of investor who prefers dividend paying stocks or mutual funds. You could be an investor who likes to play safe and never exceed 50:50 asset allocation between equity and debt. Or you could be someone who likes to invest in real estate and gold primarily.
Whatever style you like to follow, make a plan. Draw your conclusions, return expectations etc based on the plan. Then, when you have the carefully made plan and other numbers, you can figure out how much you need to invest for each of your goals. Finally stick to that plan goddammit. Don’t change the plan because now you think the market is up or down. On the other hand, if you are a rule based investor, makes some rules and just blindly follow it, unless the information on which you based your rules are flawed or changed. For example, if you plan on increasing gold allocation to 20% when the inflation is greater then 7%, then just stick to the plan. Or if your rule tells you to increase your equity allocation to 70% when the PE is less than 12, then blindly follow it. Don’t let fear of the market fall scare you.
It is more important to follow your plan than to make new plans based on various situations and news. If you keep changing your plans, the goal post keeps changing, not to mention that you will clutter your portfolio. Sticking to a plan is boring and mundane, but investing was never supposed to be glamorous or fun, it is supposed to be just that – simple and boring.