How should we invest in the present market condition?

Published: October 6, 2018 at 8:22 am

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

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.

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

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps