An unprecedented event
COVID has impacted our life in a way we could have never imagined. Till date, globally 23 million people have tested COVID positive and 821 thousand people have died. There are many businesses which have shut down, and the ones that have survived are working at very low capacity. This has resulted in significant job losses and high unemployment. In the absence of a vaccine, we continue to dodge the virus and are not able to return to normal life. The virus has forced us to change our behaviour and has stopped us from taking things for granted.
The market does not reflect the pain
But, there is a serious dichotomy between the lives of the people and the stock market.
The stock markets have been crazy over the last six months. There has seen a swift fall in the market and equally smart recovery. This is, by any measure, a very volatile performance.
From the peak in mid Jan, Nifty fell by 40% in a very short period of 9 weeks and recovered 52% back in just 22 weeks. Reliance Industries raised roughly 20 billion dollars since April in COVID times, and the valuation of the company has gone through roof up by 1.4 times since the 23rd March low.
The story is no different in the US market. The NASDAQ composite fell approximately 30% in the same period and came back up roaring with approximately 66% rise. The 7 magnificent technology companies in the US are currently commanding a valuation of 7.7 trillion. Apple has become the first company to cross a valuation of 2 trillion dollars. Apple’s second trillion market capitalization came in just the last 5 months.
But this is the story of a narrow set of companies driving the market.
How have investors reacted so far?
For investors, the fast movement in the market in the last six months has kept them guessing.
First-Time investors became nervous early on with the steep fall in the stock market and came out at a loss with no plan to enter the market again.
The best timers of the market could not gauge the pace of the market movement. They were of the view that the impact of COVID would be severe and long and were keeping the power dry to invest in the market when Nifty goes even lower. That opportunity never came as the market quickly came back up.
A few were able to do some bottom fishing but were looking for deeper bottoms that did not materialize.
Most people did not have any idea how to time to market and stayed put.
What should an investor do now?
The ground-level situation around the economy and jobs is tough. People are eagerly waiting for a vaccine which will help us tame the virus and go back to our normal lives. It will take some time before that happens.
But the stock market performance is in complete contrast. Globally, the Reserve Banks have kept the interest rate low and the governments have printed money to the tune of 24 trillion dollars. This cheap and excessive money has no other place to go but to push the stock market higher.
The human mind is driven by fear and greed. When the stock market was tanking in March this year, nobody wanted to catch the falling knife. Now the story is repeating in the other direction. The excessive exuberance will push us to err on the other side. While the COVID has given leg up to the technology companies, we need to be cautious about investing in those at any valuation.
Let me go back to the basic premise of our investment in Equity. We are investing in Equity for the long term and our short term needs are covered by other conservative investments.
Our investment in Equity will be aligned with our asset allocation. The Equity investment will be diversified across investment options (e.g. Large Caps, Balanced funds).
We will stagger a high lump sum investment but for the regular incremental surplus money, we will go with the boring periodic investment. If we have conviction in the trend of the market we will control the flow of the investment.
This basic tenet will help us simplify our investment journey and give us peace of mind in a market which is sprinting at a frantic pace. After all, we have decided that we will be happy with the money which is needed for our financial goals.
At the risk of being dull and repetitive, I keep reiterating the same approach mentioned above because while it is not a novelty, it is time tested and sustainable.
The writer is a SEBI Registered Adviser and Founder of FinMyn (https://finmyn.com). He provides Fee-Only Financial Planning and Investment Advisory services. If you want to know more about him, click on https://finmyn.com/about/.