How should we invest in the present market condition?

Last Updated on February 12, 2022 at 6:19 pm

A question many people ask today is, How should we invest in the present market condition? I discuss simple ways to stay focused and navigate the present market condition. I would wager that five out of every 10 mutual funds or stock investor is fairly new having entered around 2014 or later. The downward movement in the market, although quite normal, maybe hard to digest for many. Therefore it is time to slow down and think clearly.

How one should react to market volatility largely depends on the age of the investor and their purpose behind investing. Let us consider strategies for some generic situations.

How to handle the present market condition

1. I am a 30-something (or younger) investor. I am investing in my future via equity markets. I either know what my goals are or undecided as yet. However, I need the money only after 20-25 years or more.
   • Suggestion: Do nothing other than invest as much as possible each month!
2. I am a 40-something investor. I am investing for my future goals likes retirement, children’s education. I need the money in 10-15 years. I have been investing in equity for the past 5 years or more.
   • Suggestion:  Option (1) Reduce your equity exposure to 50% and decrease it further in the coming years. Option (2) For your child’s education find out the current cost of a UG education and ensure you have at least 50-100% of that amount in your fixed income instruments, and leave it there. Option (3) If your equity exposure is already not too high and falling every day then you can consider rebalancing as mentioned in “my strategy” below.
3. I am 50-something investor I have been investing in equity for about ten years or longer. I need the money in the next few years.
   • Suggestion: Reduce equity exposure to at least 40% for your retirement and 0% for other goals that are nearby. Follow these Seven Easy Steps and find out how strong your retirement corpus is (investors of all ages can use this)

Notice that for 40- and 50-something investors, I only talked about reducing equity exposure. The reason for that is a market fall is a mixed blessing. For young investors, it is a gift. It gives them the opportunity to appreciate volatility first-hand with no pressure so that they can handle it better in their 40s and 50s.

For 40+ investors, it could well be a curse. The risk associated with already invested capital is huge and protecting that is the first priority. Kids with not much of invested capital talk incessantly about buying on dips. It is important for those who have been investing for some years now to worry about the capital already invested first!

That is the reason I believe that new investors should just keep investing as already pointed out: Dear new investor this is the best time for you to invest in equity

How NOT to worry about the present market condition

I can think of two radically different, yet efficient ways to navigate turbulent market conditions. They, however, have a couple of common features that stand apart.

1. Do nothing. Just because the market moves up and down, why should you react? Invest as usual as per plan, as if nothing has happened.
2. Follow a tactical strategy. Use a technical indicator and use only those technical indicators and decide when to sell equity exposure and when to re-enter
3. Ignore all opinions and market news. Read more: 10 things mutual fund investors should not be doing!

Either you plan to invest systematically and reduce risk systematically or you invest tactically and reduce risk tactically. Anything in between like buying in dips is not of much use. Want proof? See: Buying on market dips: How effective is it?

To understand more about systematic risk reduction, see How to systematically reduce the risk associated with a SIP and How to reduce risk in an investment portfolio.

As regards technical indicators, there are several to choose from, you can explore the tactical market timing backtest archive and pick one. They will worry as long as you do not claim what you are doing is the best. We will consider the present status of several technical indicators in the next post.

Wait a minute, you said “do nothing except investing as per plan”. How do I make a plan? Just Download the Freefincal Robo Advisory Software Template, punch in the numbers and you got yourself a start-to-finish plan. If you want fund suggestions, you can consider  my handpicked Mutual Funds September 2018 (PlumbLine)

My strategy

I have already mentioned it here, but let state it again briefly. I am a 40-something and have been investing for ten years now. My equity exposure is rapidly falling from its planned 60% every day. If there is a significant fall, I might be tempted to pull out some funds from my PPFs (my wife has her own) and invest in equity for my retirement.

For my son’s education, I have an arbitrage fund as part of my debt component. I might switch that to an equity fund but ensuring that the total debt allocation still has an amount equal to the current cost of UG education.

So far I have not looked at my portfolio for weeks now and invested, as usual, this month. Let me close with my favourite line from a fine modern western – Tombstone. If you are stressed about the markets, say this to yourself.

Stay calm, use your head and you will be all right