There will be Another Dawn

This market will test your nerves.

Are you nervous that your investment decisions over last few years have not been favourable? If yes, what are you doing to clean the mess?

Is your current investment portfolio geared for tomorrow so that when the market goes up you will be part of the party? If not, what are you doing to spruce up your portfolio?

These are some of the questions that the investors are struggling to answer today.

I have seen multiple market cycles and this time it feels different.

There were two unique characteristics of the dot come bubble in year 2000 and subprime real estate crisis in year 2008: first they were built on significant excesses; secondly, the global market had synchronized bull-run across the globe. When the market took turn for the worse, the investors rushed to dump their holdings. The bear market was fast and furious. The new investors who entered the party in the last leg, incurred significant dent in their portfolio in absence of guidance and prior experience. But the good part of the market was that it saw “V” shaped recovery and the people who stayed with the quality investments through the trough were best placed for the next bull-run.

In India, over the last 5 years, few structural changes such as Demonetisation, RERA and GST have been put in place. The positive side is that there is a deterrent to keep black money, more businesses are paying taxes and the formal economy is growing. The real estate developers have become more transparent and the price of the real estate has become more affordable.

On the negative side, the small businesses were not ready for this change. It took significant amount of pain and time to align with the new process. The poor experience in filing GST and slow movement of taxes through the GST system made transition difficult. Earlier black money had significant contribution to the economy which has come down.

These structural changes have slowed down the economy. The private sector capital expenditure has not picked up and the jobs are hard to come by.  Lack of good Management, Ethics and Transparency among Corporates, Auditors, Rating Agency and Fund Managers have resulted in higher NPAs and NBFC crisis. The Finance Minister has substantially reduced the corporate tax to make Indian market competitive and encourage investments. The impact will lag. The demand side is still a worry as the consumer is still holding onto or postponing the discretionary expense in this uncertain environment.

Compared to the earlier bull markets, since we have less excesses in Indian equity market this time, we do not expect significant downside from here. Also, Indian economy is not in sync with US economy. When our economy starts picking up, it is expected that the US market will be in the downward trend. These factors will make this Indian recovery “U” shaped with a longer trough.

What should you be doing?

Since the Indian equity recovery will be “U” shaped, you should have patience and be ready to grind for longer period. Listing few basic things you can do to make your journey smarter.

• Protect your earning source (job/business) – Majority of our wealth is built using sustained contribution from earnings and higher savings over longer period. Ensure that your earning continues to contribute through these tough times. And to do that, make sure that you are actively engaged in the company and perceived as valuable asset to the company. If that is not the case, get engaged, take additional responsibility and get counted. Be realistic, never leave your current job under the pretension that there is better job waiting outside. If you believe that the chances of axe falling is high, leverage your network and connection to keep an alternate job opportunity warm.
• A job in hand or a good continuous income source will allow you to take more rational investment decisions
• Educate yourselves about markets and investment. You should be the final arbitrator in all your investment decisions.
• Do not take any decision in hurry. “NO decision” is better than “Hurried decision”.
• Do not invest your serious money based on input from people who are not accountable to you. Always question free advice, there is a reason why it is free.
• In case you do not have a financial plan, put one in place. Trust me without a proper financial plan, you will be throwing darts in the dark with no measurable gains. If you can do it yourselves, go ahead and do it. If not, please take help from a SEBI Registered Adviser.
• Ensure that all your investments are aligned to your risk profile. Diversification across asset class is important. Even if you are young, do not take 100% exposure to one asset class, as there is nothing guaranteed in the world. It is only the allocation ratio among asset class which you should tweak based on your risk profile, age and level of readiness for your goals.
• Transition to high quality less risky portfolio as they will endure better during the tough times

Please note that this dusk will have another dawn and this night will not be too long. Prudence and patience will not only see you through this adverse market conditions but will also position you well for the next bull-run.

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/.