Here we go again!

War clouds again – Crude up, markets down, have we seen this movie before?

Just when markets had breathed a sigh of relief and were looking ahead to earnings growth and more fundamental aspects, the roller coaster just made another unexpected dip. Here we go again! These events just highlight the nature of markets and what is a certainty – Uncertainty!

Market participants are expected to understand that volatility is the name of the game and that is always the normal case, periods of benign interludes being rare and intermittent. However, hope springs eternal and a turn toward normalcy is extrapolated as “now it is safe to go back into the water” signal. How the circle of greed and fear turns indeed.

One would think that markets and investors would learn from the past and would look through such bouts of turbulence with calm and not become manic at every twist and turn. But that would mean that the market is not being true to its innate nature. The flip side is that investors should learn not to expect the market to be rational but take advantage of the manic nature of markets. As famously described by the legendary Warren Buffett, “buy from Mr. Market when he shows fear and panic, and sell to him when he feels euphoric and elated”. The above sentence is of course paraphrased from his original sentence but conveys the sentiment coherently.

No words were spoken in their truest sense regarding the market. However, such advice though sagacious is seldom followed. Behavior is not accounted for in such moments, and raw emotion takes over the psyche of the investor. So how should we use the current situation and turn the current bit of volatility in the investors favor?

I want the facts madam, only the facts*

So quoted a fictional detective of yore. But a sentence all investors should follow.

The facts are that the Indian stock market valuations have come down significantly from even 2 years ago vis-à-vis earnings momentum. US equity markets now trade at significantly higher multiples than average and are almost at dotcom bubble valuations on a technology company index basis. Earnings growth is expected to remain robust. International asset allocators are looking to diversify portfolios and reduce concentration to technology and the AI trade.

Emerging markets, the go-to diversification engine via Taiwan and South Korea is reversing and allocators looking at market beyond these. Precious metals and commodities are viewed as too volatile for a risk reducing diversification trade. The US bond yield as a diversifier against the US equities is now flashing a very weak signal and cash is not seen as a long-term diversification asset.

Armed with these facts, the rational investor has some hard thinking to do. While these do not encompass the entire decision set, it is reflective of the dilemma most allocators face.

Decisions, decisions!

Make sure the noise does not drown the signal

• Do not fall prey to emotion and current fear mongering and ignore the facts as stated earlier in the piece.

• Review the investment goal, the term of investment and the risk appetite. If one is exposed to equities +/- 10% volatility is par for the course. One has opted to take risk. This is not an unexpected occurrence.

• A proper asset allocation across asset classes is plotted by each investor according to his or her risk appetite, goal orientation and ability to weather intermittent volatility. Without the map, one has not started at all.

• For longer term investment outcomes to remain realistic rely more on averages rather than timing opportunities and the tendency to switch too often. Both lead to overly conservative portfolios that lead to sub-par returns and increase costs of intermediation and fees.

Asset Allocation will be key

A well-diversified basket of investments will hold the investors fear at bay. A better approach would be goal based investing and sticking to a long-term plan. Here the behaviour needed would be resoluteness in the face of longer-term data despite near term hiccups.

This long-term approach ensures that one remains disciplined despite near term volatility and appearance of patterns appearing.

Happy investing!

• Sentence attributed to Detective Sergeant Joe Friday—the iconic character from the classic radio and television series Dragnet—was widely credited with the famous phrase "Just the facts, ma'am"