Geopolitics take centerstage

Geopolitics take center stage

The recent events causing the markets to remain volatile are examples of when one recalls the line from the movie “Forrest Gump” uttered with much conviction: “My mom always used to say.. Life is like a box of chocolates, you never know which one you will get”. Markets too reflect such incidents from time to time and we never know at what time we are to get which one. These current events point to a certain chocolate being served. How we “take” it is what will define how we use the opportunity.

Behavioral finance has highlighted the lack of rationality while making investment decisions. This shortage of rationality is exhibited by investors with depressing regularity when confronted with greed or fear. The current bout of uncertainty that has been instilled in the markets stems from the fear that the recent increase in confrontation with our neighbor following terrorists’ acts may spiral into a longer and much more damaging fallout. Social media and the ability to be influenced by wild rumors at this stage ensure that this emotion is kept well fueled till some time goes by and clarity can emerge.

If one were to look at all of history surrounding such events in global markets, there is enough evidence to suggest that these have happened in the past and they will continue to happen in the future. Please refer to our earliest blog on the subject when the middle eastern conflict reared its ugly head more than a year ago. https://hxgonpartners.com/wars-are-common.

Should Indian investors think that this time it is different or that since it is happening to us and in our immediate neighborhood, the impact is much more? The clear and resounding answer to that is no. In the long run, wars, pestilence, economic hardships have all happened with alarming regularity and yet the human endeavor to rise above the same has been seen to be paramount. Trust in the ability of the common human race to evolve and surmount such difficulties have been well documented.

However, there is no cure for emotions. There cannot be at this time any explanation to wish the fear away and act rationally, While the facts stare at us to the contrary, investors beholden to their fear will continue to price markets down. Now the subject to define is not whether there will be volatility (there will be) but how do we navigate through this trying period and ensure we do not make investing mistakes based on behavior.

This will call for only the resolute investor to see beyond his or her fear and act rationally. How many of us qualify for this, one does not know. But what is sure is that those investors who take the right decisions at this time and can put emotion behind them, face facts, and act for the long term will emerge successful beyond this trying time and look back with some satisfaction. Most of us (hopefully, not all of us) will look back ruefully at the decisions we took – mostly reduce or sell risk assets, move into cash or cash like assets, supposedly to “ride out the difficult times” and to enter at a “safer” time.

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” – William Feather

Diversification is risk mitigation

What are our options?

The idiom "don't put all your eggs in one basket" originated in the 17th century, likely from Spanish or Italian, and is commonly attributed to Miguel de Cervantes. It's used to advise against focusing all resources or efforts on a single venture, as a failure in that venture could lead to significant loss. Or if a more recent sage were to explain it a little differently – “Do keep your eggs in one basket and watch that basket!”

The advice from the first source is for investors who are risk averse in general. The advice from the second source is for people who understand what they have invested in and are not looking to diversify that opportunity and hence dilute the upside. Diversification used as a risk mitigation tool will reduce volatility and ensure lower returns overall. The choice is up to the investors and what suits them, rather than the “right” answer.

Asset allocate and keep calm

It will be a good time to check one’s asset allocation, revisit the case for equities and come to individual decisions regarding ability to withstand volatility, stay true to a longer-term goal, or remain reactive to every event in the market to act.

We hope that we leave behind these difficult times quickly, and our hopes and prayers are with the forces entrusted with our security and that we emerge much stronger as a nation