Don’t Let Certain Events Derail Your Investment Process

Investing one’s hard earned money is a process that requires planning and perseverance. Besides, to achieve investment success, one must follow a disciplined approach and remain invested through one’s time horizon. But in reality, many investors do the opposite and pay the price for their indiscretions. One of the common mistakes made by investors is to put too much emphasis on certain events like union budget, general election and RBI’s monetary policy while making investment decisions. While there is no denying that these are important events for the economy and the markets, it is not advisable for common investors to base their investment decisions on their outcome alone.

The question, therefore, is how should an investor react to these events? Should he ignore these events completely or restrict the reaction to making minimal changes in the portfolio, if at all? The obvious answer is not to overreact to the outcome of these events and avoid making changes to the asset allocation itself i.e proportion of investment in equity, debt and gold. However, a limited realignment within an asset class may be in order. For example, some of the announcements in the union budget may require an equity investor to move out of a set of sectors and reinvest in a new set of sectors. However, it may not be a great idea to move out of equity all together.  

It is important for every investor to know that a major part of portfolio returns comes from asset allocation. More importantly, the right way to work out an ideal asset allocation is by considering one’s investment goals, time horizon and risk profile. Hence, any change to the asset allocation should be made only if there is a significant change in these parameters. 

However, in reality, it is quite common to see investors putting too much emphasis on these events. For example, there are investors who either stop their investment process or redeem their investments during the run up to the general election hoping that they might get an opportunity to re-enter at lower levels. However, if the markets react differently, they get overwhelmed by the feeling of being “left out” and end up reinvesting at much higher levels.

A case in point is the stock market’s reaction after the 2009 election. There was euphoria after the UPA emerged victorious. The BSE Sensex hit upper circuit twice on the first trading day and the markets closed with a gain of 2099 points. Another example is a record 800 points decline in Sensex when UPA emerged victorious unexpectedly in 2004 general elections. As is evident, making wholesale changes in the portfolio on the basis of random noises created by these events can backfire. 

Remember, investing is a long-term endeavour and should be treated like one. For someone who is investing for a financial goal, which is 20 years away, there is no logic of making changes in existing asset allocation just because certain events may have short-term impact on the markets. Similarly, investing money on the similar grounds too is entirely unwarranted and illogical.

Every investor needs to know that volatility in the stock market is a natural phenomenon. However, it is a proven fact that despite suffering from extreme bouts of volatilities from time-to-time, equity as an asset class has the potential to outperform other asset classes in the long run. Therefore, though some of the events may add to or cause short-term volatility in the stock market, it’s potential to earn positive real rate of return over the longer term remains intact. However, to benefit from the real potential of equities, one must follow a disciplined approach and rebalance the portfolio periodically to keep emotions out of one’s investment process. 

Hemant Rustagi
CEO, Wiseinvest Advisors