A Lockdown For Your Investments

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A Lockdown For Your Investments
Deepika Asthana - 25 March 2020

Sometimes, “do nothing” is the best strategy that you can adopt in the equity markets. This is especially true for retail investors who do not have the financial might, liquidity, knowledge, and access to information that large and institutional investors have. It is never wise to try catching a falling knife.

Even on a regular day, equity markets tend to witness some amount of volatility. After all, there are multiple participants in the market with each participant having a unique financial situation, risk tolerance, time horizon and understanding of financial markets. As a result, prices constantly fluctuate. In certain cases, like the current attack of the coronavirus, panic and uncertainty are heightened, causing volatility to increase. When you see prices fluctuating and your portfolio getting coloured in hues of red, it is only natural that you would like to react in some way or the other. Many investors prefer to just sell their holdings in an attempt to book their losses and exit, while there are others who look at a market correction as an opportunity to buy stocks at compelling valuations. You see, activity gives us a sense of control, however false it might be.

In volatile markets, sometimes the best action is “no action”. We can never really know for how long the markets will fall or how prolonged the recovery would be. It is easy to say that investors should look at the market falls as an opportunity to make long-term investments. However, one must understand that for retail investors, capital is finite. Retail investors only have a limited amount of money to deploy into the stock markets. If the correction continues or if the recovery is prolonged, their money is stuck in an investment that is giving them zero to negative yield. Additionally, retail investors might not be savvy enough to distinguish the concepts of value and price. While the price is the money amount that one pays for an asset, value is the benefit derived from the asset. A profitable investment is one which has immense potential value for which you pay a relatively lower price. Hence it is not as simple as buying a cheap stock. On the other hand, it is also not wise to sell your investments just because they are in red. Assuming that the investment was bought keeping a certain rationale in mind. As long as the rationale still applies, it would be wise to stay invested rather than sell in a hurry.

Retail investors should wait for markets to stabilise before making any investment decisions.

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