By Vinay Ahuja, Executive Director, IIFL Wealth
The highly volatile and perhaps whimsical nature of the equity markets has been on display over the last month. Just about a year ago, India and the rest of the world grasped on to the hope provided by the Covid vaccines and embarked on a journey of “back to normal”. With markets remaining buoyant throughout, many investors were lulled into believing that equity markets can move only one way, i.e. up. However, any individual who has spent some time in the market and has witnessed 2 or more economic cycles will tell you that it is in the very nature of the market to be volatile. Emerging economic and geopolitical developments can engender both temporary as well as structural changes that have a strong bearing on the equity market, and investor returns.
Case in point being the ongoing war between Russia and Ukraine and its widespread impact primarily on global crude oil prices. At the onset of the war, crude oil prices in international markets surged, going as high as $120/barrel on concerns of supply disruptions. In response, the OECD countries are releasing 60 million barrels of oil — approximately equal to 12 days of Russian exports — to ease the pressure on price.
These developments have inevitably impacted sentiment in the Indian equity market, with key concerns being the impact on inflation, the subsequent impact on the interest rate trajectory and overall economic growth.
With India being a net importer of oil, a rise in global crude oil prices is likely to have ramifications on the country. However, considering certain growth tailwinds currently at play, this impact is expected to be more short-term in nature. In the backdrop of such a landscape, it can sometimes become challenging for investors to assess the impact of the developments on their portfolio and make optimal investment decisions. Here are three things that are market-agnostic and should be followed irrespective of the market environment:
1) Stick to your asset allocation
It is commonly known that a robust portfolio is one that is well-diversified across asset classes and even geographies. The primary way by which you can achieve optimal portfolio diversification is through asset allocation. This will dictate what proportion of your portfolio will be allocated to which asset class and, consequently, ensure that your portfolio is both well-diversified and able to generate optimal risk-adjusted returns. However, the most important thing is that you create an asset allocation strategy that is especially curated for you. There are two things that you must keep in mind if you are to truly harness the benefits of asset allocation:
- One, you need to ensure that the asset allocation strategy reflects your risk profile, return requirements and investment time horizon.
- Two, don't deviate from your asset allocation strategy.
The latter can be especially important in volatile market conditions when one tends to get swayed by emotions and make investment decisions that might not align with your risk-return parameters.
2) Invest for the long term
Yes, this particular advice has been given by many great investors and is well known. However, despite that, many investors tend to throw caution to the wind and react to short-term market developments. What happens in the short term is that there are many factors at play that can impact investment prices. It could be some temporary news, the overreaction of investors, or general market sentiment that can either pull down or push up prices. However, these price movements do not reflect the true fundamentals of the investment. It is only over the long term that the actual value of an investment emerges — a value that is independent of market trappings. Thus, even though it is well known that one must invest for the long term, it is always worth repeating this point considering the substantial value that long-term investors can potentially create.
3) Rebalance, if necessary
The idea of rebalancing might seem to contradict the above mentioned point as it would inevitably involve the intermittent buying and selling of investments. However, that is not the case, simply because rebalancing should not be arbitrary in nature. There are only specific circumstances under which you should rebalance your portfolio. These include:
- When your portfolio allocations stray away from your asset allocation strategy
- When there are significant changes in your risk profile, return requirements or investment time horizon
- When there are material structural changes in the investment landscape that can have a material impact on your investment argument
- The above developments could necessitate a change in your portfolio composition, thereby leading to rebalancing.
- These points are like your all-weather friend, supporting you in every market environment and guiding you through the troughs and peaks of economic cycles. All you need to do is to assiduously follow them.