The year began amidst a raging bull market. Global equities have made up all the post pandemic losses and are up 85% (as at 7 May 2021) since their March 2020 lows.
It’s hard to overstate how dramatic this market moment was, or how much panic was in the air. The horror of more than 700 people dying every day in New York City alone for instance was still in the future, with nurses and doctors wearing trash bags instead of medical personal protective equipment (PPE).
Data shows that many investors have missed the bull run altogether or are significantly underinvested, waiting for the ‘right’ opportunity to re-enter. Those who did stay invested through the volatility or re-entered the market in 2020 have a slightly different problem ‘Should I sell?’.
The Covid-19 crisis was the ultimate affirmation of what is called the golden rule of investing, buy and hold. Your aim as an investor should be to find high-quality companies and hold onto them for as long as possible.
It is safe to say that most of us belong to one of these categories. History shows there are time-tested methods to deal with these challenges and earn a respectable return over the long term.
To tackle the last problem first (‘Should I sell?’), we believe it would be imprudent for investors who have ridden the bull market thus far to cash out. We do not expect a major bear market to develop, at least in the next year, given accelerating global growth and corporate earnings expectations and extremely loose policy settings. We expect economies and businesses to gradually return to normalcy by the end of the year as the pace of vaccinations picks up worldwide.
Based on decades of market history, it is hard to make a case for an equity bear market without an accompanying economic recession.
Therefore, the risk of trying to time when to exit the market before any short-term correction and re-enter at the bottom are greater than staying invested (since the investor could lose some of the best days in the market by staying out).
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For this group, the best course would be to ensure that they stay well-diversified across asset classes and sectors and rebalance their portfolios if they have strayed significantly away from their risk tolerance.
Cost of inaction
For those who have stayed out of the market before or after the pandemic, the challenge of when to get back in is seemingly much harder, given that equities are now at record highs and there are increased concerns about a short-term correction.
Often, their hesitation stems from a desire to perfectly time their re-entry. from business perspective this is the single most common investment mistake.
The rules of investing
With all the noise of market volatility, It can be tempting to try to wait out for a “best” time when the market has steadied and is on a consistent upward trajectory. Though it might not seem like it, that inertia can be a mistake in and of itself.
Don’t wait, the best time to start investing is always now.
This example brings us to the seven key rules of saving and investing wisely:
- Prepare an investment plan based on your financial goals, risk tolerance and time horizon
- Set aside funds for short-term exigencies in cash
- Invest most of the remaining funds (say 80%) in a core portfolio broadly diversified across asset classes, geographical regions and industry sectors. This will help limit the downside from unexpected events (because they will happen over our lifetime!)
- Stay invested through market cycles, since time and the miracle of compounding returns is your friend
- Rebalance the portfolio at regular intervals (say twice a year) to bring it back to your risk tolerance
- Use the remaining funds (at most 20%) – let’s call it ‘funny money’ – for short-term trading (for those who want the thrill). Make sure this is based on sound research and not the latest fad, and done with a cool head – not be too greedy at the top and panicky at the bottom (using stop-losses would help remove personal biases and limit downside risks for this part of the portfolio); and
Finally and this is the crucial part – follow the investment plan! Procrastination, as we saw above, is the greatest enemy of the investor.