Column

As I write this, the Sensex is hovering around 8250 after having recovered partially from the day’s low of 7,697 points.

However, this is hardly a comfort since even the current level means a fall of around 4300 points, making it the highest monthly decline in the history of our stock market. But I am not worried.

I am dismayed, may be disappointed, even bewildered. But worried I am definitely not. Regular readers of my column would be familiar with the reasons of my seemingly misplaced equanimity. And I am going to say nothing new this week.

The market fall is on account of FII selling. It is not connected with the health of our economy. Yes, the Western economies are in trouble and investors there are in a state of panic. Their governments and central banks are taking strong measures to address the situation.

There is a gap between cause and effect, we have to be patient. Once the factors that have caused this turmoil settle, we will see some return to normalcy. In the meanwhile, it would help if we assess our own market in the correct perspective.

The toxic securities that are the root cause of this mess do not exist in our market. Our banks are well-capitalised and well-regulated. A sustained policy of controlling foreign borrowings has resulted in limited dependency on foreign sources of capital.

On the macro front, commodity prices including that of oil have declined. This signals lower inflation going forward. In the meanwhile, our two regulators - the Securities and Exchange Board of India and the Reserve Bank of India - seem to be proactively doing as much as they can to help the situation.

While the Western economies are into a recession (taking recession as negative GDP growth for two successive quarters), India is expected to grow at 7-7.5%. Unlike the West, which has a negative savings rate, our domestic savings rate is upwards of 35%.

If RBI manages to control inflation, thereby maintaining the purchasing power of the rupee, in an economy that has limited dependence on exports, growth can be maintained on the back of domestic consumption itself.

Clearly, stock prices are reflecting the current sentiment of investors. However, sentiment can only hold so long — sooner or later, the reality of the health of our economy will kick in. This is not a prophecy, it is logic.

This is why I am simply amazed reading about people seeking counselling and therapy on account of the stock market crash. I am flabbergasted that some would even actually choose to end their lives because of stock market turmoil.

Clearly, such people had never heard of a concept called asset allocation and risk appetite-based investing. The reason that I can go to bed peacefully and get a good night’s rest without worrying about what the Sensex would be up to the next day is because I haven’t invested a rupee more in the market than what my risk appetite allows me to. Consequently, even if the stock market were to shut down, my existence, or that of my family’s, will not be threatened.

Basically, asset allocation refers to the process of ‘consciously’ spreading your investments across various asset classes in order to insulate your entire portfolio from the poor performance of any one single class of securities. The objective is to balance risk by means of diversifying. This is investing 101.

All of us would do well to treat the current environment as a very important life lesson. Investor memories tend to be notoriously short. It’s not as if the stock market has never lost over 50% before. Hardly seven years ago, in September 2001, we had come down from over 60% of the then peak.

But, it looks like that lesson was soon to be swept under the wave of euphoria that was to follow. Till December of last year, it was equities all the way. Then came the fixed maturity plans (FMP) wave. Now that FMPs too have been charged of being risky, no
one can look beyond bank fixed deposits.

Investing all your money in any one type or class of instrument is always risky, no matter what the instrument is. Instead, consciously spread your investments regardless of the external environment. Amidst all the noise, do not let go of the basics. Keep it simple, keep it real.

Have around 15-20% of your portfolio invested in gold, for gold is an effective hedge during uncertain times. Don’t buy physical gold, instead use exchange traded funds. Allocate another 20% to relatively safe gilt funds. Cash can command around 15%. The balance can and should be invested in equity, not in a lump sum but in a staggered manner through systematic investment plans.

Don’t borrow to invest, ever. Do not listen to tips that your neighbour, train friend or office colleague is so gung-ho about. Even if you listen, do not act upon the tip. Instead, keep it in mind and be sure to check after a year or so what actually did happen to the hot stock that everyone was so excited about.

That is, if it is still traded. Invest with mutual funds with an established track record of at least five years. Choose plain-vanilla diversified funds. Then hold fast, hold tight and hold out. And yes, sleep well.
sandeep.shanbhag@gmail.com