| 1. | "I started investing in equities in 2007- 08 and my experience was terrible" |
| | Now this feeling was predominantly true of customers who were either young and just started investing or those who had not been investing in equities for a long time, but decided to take the plunge, given the bull run in 2006-07 and partly in 2008. The experience of many such customers led them to move out of equities in 2008-09 even while they booked losses. Many others stopped their disciplined monthly investing plan and so could not benefit from the upside that the markets gave post May 2009. |
| When it comes to equities, customers have different reasons driving their choice. Some see equities as a short duration investment call to multiply wealth quickly, while for others it is a good way to grow wealth, systematically. |
| Equity markets are a function of the overall health of the economy, liquidity flows and a few other factors. Thus, if one has an overall positive long term view on the economy, one should systematically invest in equities and stay invested. If one were to put Rs. 1000/- every month in an index fund from July 2007 till November 2009, one would still be sitting on a return of 12% per annum (annualised return) - a good rate of return considering the cycle the markets went through. |
| 2. | "I had sleepless nights while I looked at my portfolio during those days" |
| | Through research in behavioural finance, it is known that the pain of making a loss is almost three times the happiness one experiences while making an equal amount of profit! Further, some of us are more sensitive to a downward movement of our portfolios than others. Then there are also instances when one has borrowed and put money in the equity markets much beyond prudential limits in the hope of a quick return. |
| | What is important to know, is risk tolerance. While some of us are more comfortable with volatility, others have great discomfort. Now this is just a feeling and one must therefore construct a portfolio that mirrors the risk preference or tolerance. As an example, a much higher proportion of savings in fixed income instruments like fixed deposits reduces the volatility of returns. But then it also generates a lower return over the long term. It is never a good idea to borrow money and invest in the stock market beyond one's means. Since it is in the nature of market to go up and down, it can create a lot of hardship. |
| 3. | "I wish I had not taken excess loans, I had a tough time managing my cash |
| | flows" |
| | Well it is important to look at cash flows in addition to the asset that has got created. In times of market distress, the liquidity of such assets comes down drastically and the liquidation value may be lower than the cost of purchase and could lead to erosion of wealth. It is always prudent to analyse the sources of funds one has towards discharging of loans. The reliance on future expected cash flows must be lower and the overall downside must be ascertained before taking such large loans. Most financial crises are due to reduction in current cash flows but more so because of reliance on liquidity or sale of assets. In tough times both assumptions get tested. |
| 4. | " Now what, when my portfolio looks better...in green at least....can I expect |
| | further upside or should I book profits?" |
| | Our view is that this is a good time to set financial goals afresh; look at all the assets created; loans created against them and then balance the finances. Thus if one feels that excess loans are impacting cash flows, it is a good idea to reduce loans and become somewhat comfortable. |
| | If you feel your portfolio volatility doesn't fit your risk profile, then do get rid of risky and more volatile stocks (mid cap and small caps are more volatile) and then balance the portfolio to suit your risk profile. |
| | We feel that the trend of our economy is up and that markets will mirror this over time. We must continue to invest systematically towards our life goals and shield them from market volatility, as much as we can. We must protect our health and life while creating wealth for our life goals irrespective of the markets. |
| | At ICICIdirect.com we bring to you all the tools to know your risk profile and plan your investments. Please do walk in to any of the ICICIdirect stores and allow us to partner with you in your journey towards your life goals and to know more about our offerings. |
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