Yesterday (27th Feb 2020), the Dow Jones Industrial Average lost 1191 points (4.4%), the worst one day drop in history. All US indices are now down by more than 10% putting the US markets in the correction territory. The large corporations including Apple, Microsoft and Baidu have given a warning about lower revenue and earnings this quarter. The Indian Market Sensex took its cue from the global market and closed down by 1448 points. The global equity market is extremely very volatile.
The Reason
The US market after 11 successive years of Bull Run was getting little ahead of itself. The Indian Equity market is largely driven by select Large-cap stocks which have become pricey because of lack of alternatives. The growth forecast for the global market is trending lower. The market used coronavirus as an initial trigger to bring down the valuation to a realistic level.
While the earlier expectation was that the coronavirus could be contained easily but now it appears that the impact could be greater. Yesterday for the first time, the number of new coronavirus cases reported on a single day outside China exceeded the number of newly reported cases inside China. Saudi Arabia has banned foreigners visit to Mecca and Medina. Facebook has cancelled its biggest conference. Tokyo Olympics is under threat. The adverse impact on the demand side of the industries (e.g. Travel, Hospitality, Parks and Major Events) are already visible. Slowly the supply side of the industries (e.g. procurement of parts and materials from impacted countries, logistics) will also start feeling the pinch.
At this point of time, it is very difficult to gauge how the coronavirus will impact the global economy. WHO believes that the situation is getting closer to pronouncing it as a pandemic.
Investors are clueless and not sure what to do.
What should you do as an investor?
Well, this is the time to review the fundamentals of investments.
First of all, make sure that you are invested in Equity only if you have the risk appetite and can absorb high volatility.
You should also make sure that you have the emergency/conservative fund to see you through the bear market cycle and you are not forced to sell your Equity in distress.
The investment commitment in Equity should be for at least 10+ years (a typical bull-bear cycle duration) so that the market timing does not have an impact on your portfolio.
If you have lump sum money, you are better off staggering your investment over a longer period using investment through SIP or periodic investment.
It is very difficult to time the market i.e. to come out of the market when valuation is high and get back in when the valuation goes down. As an investor, the best you can do is minor adjustments by tweaking asset allocations. At any given point of time, if you believe that the market has become expensive, you can reduce the equity allocation and increase the debt allocation. Similarly, if you believe that equity has become cheap, you can increase the equity allocation and reduce debt allocation.
If you have an existing investment in Equity, stay put. If you have lump sum additional money to invest, stagger your investment over a period during which you expect the market to be low because of the impact of coronavirus.
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/.