FOR retail investors, expecting the unexpected has become the norm, rather than an aberration. The events unfolding on account of demonetisation is an ‘unknown—unknown’ phenomenon with no precedence. The earlier instance of 1978, involved only very high denomination notes and not the commonly used notes, which is the case today.
Falling bank rates
Bank interest rates are going south, which is hurting investors who want a fixed and secured income. The value of real assets, as in gold and real estate, again is not comforting to investors.
Equity as an asset class has volatility, which pushes away many investors. For the uninitiated and those who prefer status quo, the current financial situation appears gloomy. So was the case in 2008 when big banks went bust globally and the repercussions were felt in India too. That was also in the ‘unknown—unknown’ category.
So, as an investor what did you do in 2008? Do you have a record of your action plan and the steps which were taken?
Steps to follow
It’s always recommended that you initiate the investments with a plan and goal. And this process should have an Investment Policy Statement (IPS) which will form the framework of your decisions and actions for both predictable and unpredictable events. It is important that we control or try to control the biases and the emotions which we have, in this investment journey.
The statement should mention the goals, action plan and decision making elements. This will allow you to bring a method and process for the action plans as opposed to taking adhoc decisions.
It is a good time now to go back to the drawing board and revisit the investments. Ask yourself, whether the investments initiated are with a plan and have a goal. If not, then tag the investments to the goal and the time horizon. Also, if you are a disciplined investor with a Systematic Investment Plan (SIP), check the time horizon and asset allocation.
Do take a walk into the past. Look at the equity markets in periods such as FY07, FY09, FY12 and FY16. Each period throws up distinct data. Optimism fuels euphoria and then events drive pessimism and fall in the markets. It is time that you put in checks and balances in your portfolio to make use of this data.
Asset allocation and cash flow are the basic framework to design the portfolio. Investing short-term funds in long-term products with less liquidity will drive the portfolio away from profits and gains.
Events are opportunities to revisit your investment portfolio. Change in price is not a gain or a loss. It is only a display of price. There is profit or loss only when you sell. Getting the framework in place will provide the directions and is key in the investment journey.
The writer is founder and managing partner of BellWether Advisors LLP
