What should investors not do now?
The Fed has pulled the plug out of the market and all risk assets are in a free fall. The lack of another round of quantative easing by the US Federal Reserve (Fed) has led to a flight to safety by investors. Stocks and currencies are being sold while US treasuries are being bought. Equity markets across the world including Indian equities have fallen by over 3% while currencies have fallen by over a percent against the US Dollar (USD) since the Fed meeting ended on the 21st of September. The risk aversion trades are likely to continue as there seems to be no solution to problems in the Eurozone while the lack of a monetary stimulus to the US economy will lead to sluggish growth in the largest economy in the world.
India too is facing tough times. Global risk aversion has pulled down the Indian Rupee by over 10% against the USD in the last one and half months while inflation staying sticky at over 9% levels is forcing the RBI to raise policy rates. Interest rates in the economy are at three year highs leading to worries on growth. The corruption scams have added to India’s woes leading to equities markets falling by close to 10% since the beginning of August 2011. Indian investors are reeling under the double whammy of global and domestic issues.
Investors are being told what to do in such markets by experts. This article will tell investors what not to do in such markets. The first advice is not to listen to experts. Experts would have told you to stay invested in equities at peak levels of 21000 on the Sensex seen in late 2007 and early 2008 and the would have told you to exit equities at levels of 12000 on the Sensex post the market crash in 2008. Experts will tell you to stay away from risk now given that markets have crashed significantly, after telling you to stay invested in equities when markets were moving up in early 2011. Expert advice does not help.
Investors should not sell in panic or buy on dips. Both the actions are bound to cause distress in volatile markets. Markets will rise after investors sell and markets will fall after investors buy. There is no rational in such risk averse markets.
Moping about previous wrong investment decisions will not help. The decisions have been made and losses have been incurred.
Investors should not look to capture tops and bottoms. Volatility will ensure that tops and bottoms overshoot by a wide margin.
Stocks that have fallen by 50% and above will fall further. Trying to make money in such stocks is futile.
Derivative strategies should be avoided like plague. Leverage in such volatile markets is a recipe for disaster.
Long term investors should not become short term investors and vice versa. Positions held with a long term view should not be sold while positions held with a short term view should not be held.
Volatile markets will calm down and enable a more analytical approach to investing. Investors should not get carried away by volatility.