Saturday, January 16, 2016

How To Retain Your Sanity In A Volatile Market

Courtesy : Investopedia


In the long term, stocks outperform bonds and bonds outperform cash. Can you name a 20-year period over the past 100 years when they didn't? Unfortunately this is something that many people forget as soon as the markets get ugly. People forgot in 1974, 1987, 2002 and 2008 as they panicked and sold, only to miss a recovery in prices. Why does this happen?

We often make our long-term investment decisions using historic market data to determine an asset allocation. Market return data are typically presented in literature and marketing material using annual, quarterly and monthly returns. These periods are fine for measurement, but they often miss what is really happening day to day, especially the terrifying moments that occur over a few days or even intraday. It is these anxious periods when sleepless nights occur and when investors make emotional decisions.

There are a few days during every bear market when we all wonder how low the market can go. Those are the days when you cannot flip on the television, the radio or even check your e-mail without in-your-face bad news about stock prices. Those are the days when you can be certain the headlines on the six o'clock news and in the newspapers will highlight the money you are losing, and they will feature countless gurus forecasting deeper losses.
The terrifying days are also the times when you should turn off the television, tune out the gurus and take the dog for a walk. If you can't get your mind off your money, you're not sleeping at night because you are worried about your portfolio, and you are teetering on the verge of making an emotional decision to "sell it all!" then action needs to be taken. Here is what you should do:

First, look at the amount of income you are getting from your current investments. The income coming from your investments generally does not go down even though prices do. Stocks and bonds continue to pay dividends and interest. When your annual expenses can be covered by the cash flows from dividends, interest and outside income, it makes it easier to ride out a bear market. This income reality check helped a lot of my clients get through the 2008 bear market.

Second, if the income reality check does not put you at ease and you are still sick to your stomach about the future of your portfolio, you have too much stock exposure and need to permanently reduce it. How do you do that? Lower your equity position by 10 percentage points. For example, if you are at 60%, go to 50%. If you are at 40% in stocks, reduce to 30%. A 10-point reduction in equity exposure usually reduces investor anxiety long enough for the stock market to recover.

Once the 10-point reduction in stocks is completed, keep the allocation as is through the bottom of the market and beyond. Don't go back to the risk level you once had in your portfolio, because you may be setting yourself up for another emotional sell during the next bear market. This small reduction will likely have only a small effect on the long-term return of your portfolio and a huge effect on your short-term psyche.

Third, if you are still having an emotional reaction after a 10-percentage-point stock reduction in your portfolio, you still have too much risk. Reduce the equity allocation by another 10 points. This should allow you to think clearly and get past the bear market. Once you get to this level of risk, stay there, even when the market recovers.

We have all made an asset allocation mistake during our lives. These mistakes tend to manifest themselves in bull or bear markets when we realize our portfolios are not in line with who we are emotionally.

I have no idea when the next bear market will occur, but it will occur--and when it does, some people will feel the need to panic. Don't do that. Any adjustment to portfolio allocation should be done in a logical and controlled way. These changes require deep thinking and even-handed judgment. A good investor checks and rechecks his or her feelings for symptoms of irrationality and then deals with the situation appropriately.

59 comments :

  1. hi sir.
    I have seen the scrips u choose.i find it very crazy, tat wat u see and think its good to buy. like granuels, kaveri aries astec....and many many more...which are later bought by so called big investors etc....
    Balance sheet, management is open to all...but is it possible to describe what extra u see in a stock....or also mere intutuion.....or as people say stock picking is an art...which goes beyond balance sheets

    Gaurav, Mumbai

    ReplyDelete
    Replies
    1. Try to keep your eyes and ears open and catch the emerging trends at the earlier stage . You will get a chance to buy first and sell to those buyers who will come later after analyzing balance sheet :)

      Try to understand the emerging opportunities and promoters ability to utilise such opportunities and their treatment of minority share holders , balance sheet will follow.Commonsense based approach is never behind equation based methods.

      Delete
    2. Very true. I found many so called high end advisers talking about DFM foods,Tasty bites at 300&600 levels. Hope they will start advising about Bambino Agro at 500 levels. Kudos to you Sir.

      Delete
  2. Sir please give your curent view on Sintex Industries after their current results.

    Thanks

    ReplyDelete
    Replies
    1. Considering the fall in raw material price , result was below expectation , but price already discounted for that.

      Delete
  3. Very nice and timely article. Thank you sir.

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  4. Very apt article. Infra is getting much needed leg up. Would like to ask your picks in infra sector - both for high risk as well as steady compounder.

    ReplyDelete
    Replies
    1. There is lot of potential for infra companies in a country like India but many of the listed company's balance sheet is not in a good shape . Try to choose companies with less debt and good execution history.

      Delete
  5. Sir, Thanks for the post at this appropriate time. Could you please share your thoughts as to how long this Bear run is likely to continue!

    ReplyDelete
    Replies
    1. Why we need to waste our time to predict something nobody can do accurately ? . :)

      It is better to find out companies punished unnecessarily in this carnage.

      Delete
  6. Dear VP Sir,
    Is their any change in your perception for Arrow Coated Products. Your Previous view was @ Neutral @ 850 + levels.

    ReplyDelete
    Replies
    1. This company suggested as a buy @ Rs.15 . A company with good business prospects never means it is a good investment at ANY price.

      Delete
  7. Sir what are your opinions about Gail and Pincon Spirits?

    ReplyDelete
  8. Really good article. Helped me to calm my nerves. I think I will use this volatility to build my portfolio.

    ReplyDelete
  9. Sir, Is there any chance of godrej agrovet will reverse merged with astec life science?

    ReplyDelete
  10. Dear sir, thanks for the timely article..

    "one up on wall street , peter lynch ends with these notes...
    "When you invest in stocks, you have to have basic faith in human nature, in capitalism, In the country at large, and future prosperity in general.So far , nothing's been strong enough to shake me out of it"
    hoping to hear more from you sir....thanks..

    ReplyDelete
  11. Just what the doctor ordered. Thanks for guiding us through the tough times.During tough times most Gurus disappear and remaining make things worse by forecasting darker days. The real guru is always there to guide u through the dark tunnel into light.

    ReplyDelete
  12. Do you like transport corp after correction? Especially with demerger occuring shortly?

    ReplyDelete
  13. Hi Sir, Requesting your current view on IFGL Refractories which u have suggested 2 years before. It seems Steel industry is going through critical phase

    ReplyDelete
    Replies
    1. Considering the current situation in steel sector it may take some more time for any meaningful recovery.But some bounce can't be ruled out if further steep fall .

      Delete
  14. very nice article at a very appropriate time. thank you sir

    ReplyDelete
  15. Dear VP Sir,
    Many experts globally are fearing long term deflationary and recession crisis world wide due to Chinese slowdown, oil price fall etc. Would this also not affect Indian companies especially the export oriented companies? Please share your views.

    ReplyDelete
    Replies
    1. Depends on the products companies are exporting, market share of China in that particular market ..etc

      Delete
  16. Indeed an exceptionally well guided message to cool down nerves in tge recent bear phase.
    Thanks for the article VP sir.

    ReplyDelete
  17. Sir your latest think thank on orchid chemicals sir or u stick on to your last 3 recommended on this counter

    ReplyDelete
    Replies
    1. I believe Orchid is in right track but Chennai flood may impact in near quarters as the company suspended operations for few weeks.

      Delete
  18. Sir, Planning to invest on following stocks - NTPS, SBI, ONGC, Tata steel, Coal India, BHEL as the current valuation is good. Please advise whether this is the correct time to enter or good to wait some more time to come the prices further down?

    ReplyDelete
    Replies
    1. Generally tracking only small and mid caps.

      Delete
  19. Dear Sir,
    After Studying fundamentals I found following 3 companies for investment purpose. Please help me to take decision for investment view
    1) FINOTEX CHEMICALS LTD (NSE CODE- FCL)
    2)DCM SHRIRAM LTD (NSE CODE- DCMSHRIRAM)
    3) SARLA PERFORMANCE FIBERS (NSE CODE- SARLAPOLY)

    ReplyDelete
    Replies
    1. Not tracking any of the mentioned stocks.

      Delete
  20. Hi sir, need ur view on saregama......

    ReplyDelete
  21. Sir your views on samkrg piston and valiant communication.sir please dont ignore my question and please suggest

    ReplyDelete
    Replies
    1. Views on these stocks already shared

      Delete
  22. Sir almost every stock available at attractive price. Should we start buying or wait for some more time?

    ReplyDelete
    Replies
    1. General answer is difficult , depends on valuation ,case to case.

      Delete
  23. Dear VPji,

    Your valuable thoughts on Marksans please. As it seems to have lost almost 40% of its share price in the last week. Is this a good time to accumulate?

    ReplyDelete
    Replies
    1. Stock suggested @ Rs.4 an requested to take profit.

      Delete
  24. SIR,i have IL&FS eng @80...should i average now in current volatile market or wait sometime for more correction.....long term view.

    ReplyDelete
    Replies
    1. Already shared my view as a comment below the last posting on IL&FS Engg

      Delete
  25. Sir, SKM is falling like anything..do see any serious issue or its just over reaction by market participants? M still holding all qtty for long term.

    ReplyDelete
  26. Dear Sir,

    As the market corrects itself, i think its time for us to look back on stocks discussed and their health. Valuation of many of them is healthy again as they fall from highs. While some of them have changed fundamentally like Koparan. It will be great if you can start giving more updates on the stock where a re-entry might be a good idea right now.

    Thanks in advance.

    ReplyDelete
    Replies
    1. Prefer to review once latest results are out.

      Delete
  27. Sir, kindly share your updated views on lincoln pharma.Do you think tanzania banning their products is a worrying sign for a long term investor?

    ReplyDelete
  28. What is your view on mangalam drugs bought at 285.00

    ReplyDelete
  29. Thank you VP sir for being with us in the deep red market. you had given us so much, not only wealth but the knowledge & confidence. Hoping this (trouble)too will pass away. Alive with hope as you accompany us. Again Thank you for your article @ the right time.

    ReplyDelete
  30. What is happening in AB NUVO? 56% decline in sigle day.

    ReplyDelete
    Replies
    1. It is because of the de-merger of branded textile business( Brands including Van Heusen,Allen Solly,Louis Philippe ..etc ) . From hereon this de-merged business will be with Pantaloon Fashion Retails Ltd.

      Delete
  31. Hello Sir,
    Your view on stylam industries if you are tracking it?

    Thanks!

    ReplyDelete
  32. any views on idfc and idfc banks sir holding since long but not much appreciation even after demerger i feel lost even good management did not help this stock to reward small share holders

    ReplyDelete
    Replies
    1. Not specific to these stocks the entire sector is under performing.

      Delete
  33. IL&FS Engineering and Construction has bagged Rs 524 mn order from from GAIL

    ReplyDelete

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