Indian stock markets are not responding positively and are volatile inspite of the recent stimulus package series announced by the finance minister. Many of you must be wondering what to do in such a scenario. There is a higher probability that due to the increase in risk investors end up taking wrong decisions based on emotions
which then affect their long-term financial goals. Here are a few tips to deal with such emotions.
Belief in the markets
As you all know, the stock market is like a pendulum which swings to both extremes on which investors can have no control. But you do have control on your own emotions and actions. It is difficult to make rational decisions especially when markets are volatile. The investor needs to be rational and optimistic during volatile times as the initial dust thrown up by the turmoil will settle down at some point and the market will bounce back. We do have empirical and historical evidence for the same happening several times in the past.
Rebalance your portfolio
Behavioural finance literature states that generally investors have the tendency to look at what others are doing when they are not sure of what to do. This is known as herd behaviour. During volatile market times, you hear so many things in the social media, from friends and relatives like ‘everyone is getting out of the market to protect their capital’. So should you also exit? Avoid exiting the market in a panic and booking a loss. Ideally, to tackle herd behaviour, investors should rebalance their portfolios, look for tax savings, and given a chance increase the savings percentage, etc.
Consider additional payment on some loans
Another way to deal with uncertainty in the market is that if you have a housing loan or high interest-bearing credit cards, look at the refinancing options which will lower your monthly cash outflows. Generally, interest rates have moved sharply lower during such scenarios. Refinancing is a great opportunity to reduce expenses during the time of economic uncertainty. Seeing great demand for refinancing, some lending institutions may ask for rates higher than that of the market rate. In such a situation, one should shop around and make several enquiries in different places before signing up for refinancing facility. However, while availing such arrangement you need to ensure the stability of your income in the forthcoming near period.
Discipline is the key
Let us assume that your long-term financial goal is your post-retirement life which may be still decades ahead. In that case, you should take a long view of the market pullback. It means that instead of panicking and selling your investment when the market declines, choose a mix of investments based on your timeline, goals, financial situation, risk appetite and then stick to that long-term approach. Do not worry much about the temporary fluctuations.
To conclude, if you are still working and saving for the future, a downturn should not be a reason to panic. Instead, it provides you an opportunity to take a re-look at your investment portfolio, and rebalance your portfolio, to reduce your monthly expenses, to boost your savings, and invest according to the prevailing market conditions.
The writer is a professor of finance & accounting, IIM Tiruchirappalli