From the queries I receive from friends and readers these days, one thing appears certain – these are most challenging times for small and HNI investors, especially those who decided to raise substantial cash in their portfolios last spring as the pandemic fear gripped the markets.
Many of these investors are not convinced about the sustainability
of current stock prices and continue to expect a sharp correction is in the
offing. Nonetheless, they find the daily rise in stock prices alluring and
difficult to resist. In this intense struggle between their convictions,
expectations, beliefs, fear of missing out (FOMO) on a secular rally (if their
conviction is misplaced), and greed to make some quick money, some of them
appear to have already surrendered to their fears (FOMO) and greed and invested
in stocks which normally they would have avoided due to inferior quality of
management, earnings and/or balance sheet.
I personally do not support –
(i) A binary
call on portfolio, i.e., mostly invested or mostly cash.
I like to stick to my pre-defined asset allocation, regardless
of the market conditions. An opportunistic tactical allocation sometimes
becomes necessary, but it does not exceed 10% of the standard allocation.
(ii) Investing
against conviction.
I find investing in ideas without conviction or with borrowed
conviction totally avoidable. Empirically, I have found most investment
endeavour that lacked conviction or were based on borrowed conviction, usually
get wound up in an unpleasant manner.
(iii) Allowing the
sentiments of greed and fear to drive investment strategy.
Investment strategy of an investors should be driven by his
individual circumstances – stability & security of income, health, savings,
financial and social status (house, marriage, dependent children & parents)
etc. Market movement driving the investment strategy is a certain prescription
for disaster, in my view.
(iv) Investing in
poor quality for quick gains.
Just because the good quality stocks and bonds are have become
expensive cannot be an argument for buying poor quality bonds or stocks. The
events in stock and bond markets during 2017-2019 could be a good guide on how
to conquer the temptation to make quick gains in stocks or earn few extra bps
on bonds.
(v) Bothering
about relative return.
The rule is that if you are diabetic, the sweets in neighbour’s
plate should not be your concern. The investment goals (returns) of an
individual investor should be mostly pre-defined as per his investment strategy
based on his risk profile. Benchmarking returns to some random index or other
measure may be appropriate for professional investors (e.g., fund managers)
whose remuneration depends on his performance. For individual investors it is
meaningless. Remember, you have to pay your child’s college fee from the money
you earn from investment. You cannot be happy losing only 2% when Nifty is down
12%.
So, my suggestion is that the investors suffering from fear or
greed may urgently call their respective advisors and make an investment
strategy for themselves, rather than floating uncontrollably between hope &
desperation.
I would also recommend keeping investment strategy away from the
realm of fiction. Being average is a great strength for an investor. Over 90%
of Indian investors may be earning less than nominal GDP growth rate on their
financial investment portfolio over a longer period. Chasing the returns
usually seen in fictional success stories and few cases of extraordinary
brilliance, could be dangerous to their financial health. Always remember you
are riding an ordinary bicycle. You should not be competing with 1500tonne
Lorries racing on expressways, for you might get crushed without anyone
noticing.
