Human psychology plays a big role in investing. Decisions are taken not just through logic but also emotions.
Fear and greed drive investor decision. A lot of people start investing when markets go up. On the other hand, they stop when markets go down. This is completely opposite when we buy other things.
People forget that there are underlying companies with business – and stocks just represent ownership in that company. When stocks go down, that company is available for cheap. And smart investors buy.
Recently, I have been getting a lot of questions like:
“Where are markets headed?”
“Is recession coming?”
“When are markets going to crash?”
I wish I knew. It is almost impossible to predict markets. The best of the minds have failed in the past. So instead of wasting time in predicting markets, I follow a process. Here are a few pointers I follow and might benefit you as well.
In all my investing journey, I have realized that it is more about managing yourself than managing your portfolio. Our returns are heavily dependent on how we react to market ups and downs. How we control ourselves not be being carried by greed when markets rise and by fear when markets fall.
There are various ways to deal with it. Some people go on vacations. Some completely ignore the news channels. I do both.
Diversification is one simple concept but not well understood by a lot of investors. There are multiple types of assets one can invest in – stocks, bonds, real estate, gold, international equity etc.
Diversification helps you in dealing with volatility with one specific asset class. Let me explain with an example.
Let us say, my portfolio allocation is as follows:
If you remember, there was a huge market correction in small-cap and mid-cap funds a few months back – diversification helped me ride this easily because only 20% of my portfolio was in small-cap and mid-cap funds.
Similarly, low exposure in sector funds helps me deal with high volatility in sector funds.
Your allocation depends on your risk profile and your goals. 30% in debt might be too high for you (if you are a college student and do not need money in the next 5 years) while it might be less if you are a retired person living on your investments.
Gold for me is like an insurance if the world falls apart.
One good thing about mutual funds is that they let you diversify across multiple asset class.
I have been investing for the last 18 years and I have learned two things about the News that we read.
On point 1, just pick up any business newspaper from the last month or the last year and you will realize what I am saying. Investing is for the long term, and most of the news does not make any difference. More so, about the market up and downs.
Even experts who speak regularly on news channel have gone terribly wrong in the past.
Liquidity means access to capital when you need it. All the good investors I know always keep some liquidity. It might be 5% of your net worth or 20% of your net worth or whatever you are comfortable with. All your portfolio in liquid funds or savings account is actually your liquidity.
Let’s say if markets crash 30% in the next week – one can use liquid cash to deploy in the beaten down markets. Most of the investors lose out because they face a liquidity crunch in the falling markets.
SIP is one of the best methods to stay invested in the stock market – be it going down or going up.
Karan is an adventurous investor. He reads the financial news every day. He invests when he thinks is the right time. He has opinions on how markets will react to elections, wars and natural calamities.
Arjun has been investing for the last 15 years. He has his SIP running. He keeps increasing his SIP amount as his salary increases or his expenses go down. He also manages enough money in liquid funds to make sure he is prepared for emergencies.
Whom do you think will win? Arjun will be much happier and richer in my opinion.
Anshul has even created a video on this, you can view his opinions about it here
Stay invested with your SIPs.