Managing ups and downs in the stock market

Whenever the market is in a strong uptrend, lot of people enter the equity market via Mutual funds or PMS services or some directly buy stocks on their own. We see the momentum become stronger and stronger. But it’s only when we look back in time, that we realize those were euphoric times. For example, in the month of March 2015, if someone had told you that nifty at 9000 level was making its top, and that you would see a fall of 30% from there, it would have been hard to believe. Most people think in a linear manner, i:e when the market go up, they  believe it will would become double in a year, and when it falls, they feel it will become half in a year. This kind of thinking prevents people from making money in the stock market. People invest in so many instruments like Fixed deposits, ULIP, PPF, Recurring Deposits, Insurance policies and what not, without realizing that only equity asset class has the potential to give around 15% CAGR in next 10-15 years.

If you had invested Rs. 10,000/- around March 2015 and saw within 9-10 months you have lost 20% and your portfolio is Rs. 8,000/- would think it’s too risky. But if the same investor had remained invested till December 2017, his investment would have not only recovered but would have been in profits. This kind of volatility makes people jittery and makes them forget the initial reason and time period of buying that stock. Their investment plan completely goes for a toss.

There are different styles of investing. Some people buy stocks regardless of the growth of the company. Their focus is price and sell it when they feel their target is achieved. There is another style where investment is made in high growth companies with a long term potential intact. When this style is followed, we are confident that company is growing and any price correction is an opportunity to buy. The risk of losing all your money is almost zero. When the market pulls back from its down phase these high grown companies are the first ones to come back. People who are able to control their emotions during the down turn as well us uptrend, are the ones who make good money. More often than not, people sell their investments when they see it become doubled. This prevents them from fully reaping the benefit of the full growth cycle of the company. People who remain invested for 5-10 years realize that wealth can only be created in long term.

There are many companies which are growing really fast and consistently with a growth rate of more than 30% CAGR in last 5-10 years. But volatility of 30-35% destroys best of investment plans. Remember, people think in a linear manner and they expect the fall to go to 60-70% or even more.

One undebatable aspect of stock market, that the stock prices have to follow the earnings. There are times when a fast growing company doesn’t move for 6 months or even a year. But that doesn’t mean the company is not worth investing in or you should exit. The stock prices haven’t moved but earnings have grown, which makes the stock cheaper. Which means, it’s the time to buy. Lot of times people end up buying at all-time highs. But if the stock selection is right, there is nothing to worry. It only means that you may not get returns for the first 6 months or a year. When time passes, the earnings catch up and the same stock becomes cheaper and the stock price moves up. Thus when you invest with a 5-10 year horizon, depending upon when you invested you get returns, but in the long run, you will certainly gain. When you expect that the stock should perform from the day you bought it, that’s where the problem starts.

If you have opted for a Portfolio management service, then all these ups and downs are managed by the fund manager. You really don’t have to worry. It’s like you are sitting in a flight and the plane shakes due to bad weather outside. As a passenger we do nothing and are busy enjoying our flight. We know that the pilot is trained and he would take care of it. That’s exactly the case with PMS services.

Whereas if you are managing your portfolio on your own, then watching your portfolio value go down becomes difficult and you tend to make emotional decisions. More often than not, people exit when the market is falling. Even if you are good at picking up the stocks and have the courage to buy them, it is the patience to hold which is missing. Our ultimate aim is to create wealth. Thus it makes more sense to opt for PMS services and let a professional fund manager handle your portfolio than managing it yourself. Of course there is a portfolio management fee but that’s there with every profession, be it a doctor or a lawyer. Do you ever try to fight your own lawsuit or treat your own injury yourself? Then why do you think it is easy to manage your stock portfolio. It is an equally technical job and requires professional expertise.

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