Investors have a lot to fear in this current market environment. On the domestic front there are fears of weakening economy, rising inflation, Rupee (INR) weakness and fluid political scenario. On the global front there are fears of the Fed withdrawing liquidity support, European economy in a free fall, Japan destabilizing its economy by doubling its monetary base and China facing a severe economic slowdown.
Investor fears are definitely not unfounded. India’s economy is growing at decade low growth levels of 5%, consumer price inflation at over 9.3% is eating into savings, INR is threatening to continuously break into all time low territory and a fluid political situation is raising the spectre of hung parliament in polls scheduled for 2014.
The global situation lends no comfort. US economy is being propped up by the liquidity infusing actions of the Fed while Europe is floundering with recession and record unemployment. Japan is depending on its central bank opening up its printing press while China is as opaque as ever on its true economic picture.
The question is should fear rule your investments or should you invest with fear? The answer is the latter, invest with fear but do not let it dictate your investments. Investments made with fear are likely to perform much better than fear driven investments.
Fear driven investments would mean that you are investing with the probability of all your fears coming out true. Economic and market collapses rule your investments and most probably you will either end up being in cash or cash equivalents or in physical assets such as gold and real estate. However the fact is in times of a complete market collapse, cash will be useless as inflation will eat up real returns while there will be no buyers for physical assets that will become as illiquid as ever as buyers vanish. Unless you actually take money out of the country into USD assets or assets of safe haven currencies such as Swiss Franc, you can never insulate your self from economic shocks.
Investments made with fear are a much better alternative to fear driven investments. The fact that you fear for your capital in an uncertain world would make you think carefully about your investments. However you will still invest in the best asset classes that you believe will perform but you will be careful on the individual securities that you invest in. For example your equity portfolio will have sound, fundamentally strong stocks while your bond portfolio will have a good mix of risk free government bonds and AAA rated corporate bonds. You may not leverage yourself too much on property while gold would be seen as opportunistic rather than hedge against collapse type investments.
You can find fear if you want to. There is a positive and negative to every factor that rules the market. Yes, weak INR is hugely negative but the positive is that policies will be fundamentally stronger to strengthen the INR. Fed removing stimulus is negative but the fact that stimulus is taken off would mean the US economy is on a recovery path.
You can let fear drive your investments but you are letting yourself in for a rude shock when your fears do not come out true. On the other you invest with fear and that would make your investments more in tune with where markets are headed rather than when the world would collapse.