Podcast 4th March 2016
A week ago there was deep pessimism in both global and domestic financial markets. Global equity indices were deep in the red, global bond yields plunged and currencies were volatile. In India, the Sensex & Nifty were trading at close to two year lows, the INR was threatening to breach its all time low levels seen in August 2013 and bond yields were rising on lack of market demand. There were talks of global recession, volatility on Brexit and China hard landing.
The markets have bounced back smartly this week, with global equities up by 3% to 4%, global currencies stabilizing and bond yields rising from lows. In India, the Sensex and Nifty are up by over 6% each, INR is stronger and bond yields are down. Pessimism has turned to optimism on economic recovery led by US, China soft landing and hopes of Britain not leaving the EU. Markets are taking India’s budget for fiscal 2016-17 positively as the government has stuck to fiscal consolidation even as it spends on the rural economy and infrastructure.
The sharp turn of the market has caught many by surprise even as the sharp downturn of the markets at the beginning of calendar year 2016 had caught many off guard. In a span of two months, markets have gone sharply down and have bounced back from lows. Such kind of volatility can easily cause huge dents in your portfolio especially if you get caught on the wrong side of the volatility i.e. if you bought high and sold low.
How do you avoid getting caught on the wrong side of volatility? Ideally if you can sell at the top and buy at the bottom you come out the winner but very few actually do that. It is not easy to judge tops and bottoms especially if these occur in short spans of time.
My portfolio is long term in nature and I don’t mind steep falls in the value of the portfolio is one good way of avoiding selling low. However what if low goes lower and then you start panicking? You may be tempted to sell your portfolio fully to avoid the stress of seeing the value go further down.
Similarly if you had held on to cash in the belief that markets are too hot and waiting for a correcting, markets may just go up and up forcing you to buy in haste and you could be buying right at the top.
The best way to avoid buying high and selling low is to keep rebalancing your portfolio. How does this work? Lets say you have built a good portfolio of stocks and markets have done extremely well. A look at your portfolio will reveal that some stocks in your portfolio have far outperformed other stocks. Many would have hit your long term targets as well and would be looking highly valued. Here you can either take a call to sell stocks that have hit your long term targets or just avoid deploying more money into the markets. In this way you will not end up buying at highs.
Similarly if the markets have fallen and your portfolio is now looking cheaper than what it was before the markets fell and you have enough conviction that the business prospects of the companies in your portfolio have not been affected, then you should buy into your portfolio rather than sell into your portfolio. In this way you will avoid selling low.
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