It is a time of conflict. After events that shook Israel last weekend, things have flared up in the Middle East. Israel’s retaliatory action has put the Gaza Strip in a severe humanitarian crisis. The world was barely making adjustments to the ongoing strife in Ukraine. The new conflict will also likely hurt your money in the long run. Oil and gold prices were quick to react on the way up.
When panic sets in, investors tend to look for safe havens. The US dollar has strengthened significantly against major currencies. All of that puts pressure on global inflation. Central banks raise interest rates or keep them elevated to combat inflationary pressures. That increases the cost of money for individuals and businesses. It could start in areas directly affected by the conflict first. The pain spreads eventually.
The Reserve Bank of India has maintained high-interest rates in India. That is needed to cool down the consumer price inflation in the economy. Your money needs faster economic growth but does not need high inflation. As India heads into a general election in May 2024, there will be further uncertainty on policies as significant decisions will be put on hold.
Many of you investing regularly through mutual funds are quick to press panic buttons. Money is pulled out of risky assets like small and mid-cap stocks. However, mutual funds are a vehicle for the long term. Yet, the Association of Mutual Funds data in India shows that most of you are trying to time the market. Look for a point when prices are low and exit sooner than needed. When there is a threat of war and fear, many of you tend to sell equity assets. While that may be the right thing to do to protect your savings, you need to look for the impact of such a situation carefully before acting on it.
Equity prices move in cycles. They bounce back after they fall. We saw that in the aftermath of COVID-19. A key driver for equity prices is underlying listed companies’ business and profit growth. If that is likely consistent, then there is no need for any panic selloff. Your equity assets are meant for the long term. You should not indulge in timing the market. Your equity investment requires time to grow. For that, they need to ride through the market cycles.
Warren Buffett, the legendary American investor, used to say that you should be greedy when others are fearful and fear when others are greedy. Equity markets are not meant for making fast money. No investment is meant for doubling it in quick time. Anybody who promises or says that you can invest and multiply your money in 3-4 years is trying to fool you.
We often talk about the benefits of the power of compounding. If you invest in small amounts regularly for 15-20 years, you can achieve your financial goals and retire rich. However, if you look for the right time to enter or exit, you will end up trading in the market. Buying and selling of equity quickly does not usually result in wealth creation.
You must identify the right businesses and stay invested as long as possible. You can double up on your investments in times of conflict or panic. Taking a leaf out of Warren Buffett’s book, you can get greedy when share prices fall in a panic situation. That strategy helps if you invest regularly and have surplus money in the bank. It also helps if you do not withdraw that investment often.
As an individual, it is not easy to keep up with the information that can affect your investments. You can certainly get help from a professional financial advisor to determine appropriate asset allocation. At the same time, some algorithms mine through a lot of information and help you build a portfolio. All major stock brokers offer you an opportunity to invest in a basket of stocks or mutual funds determined after mining data. In modern investment times, there can be no better idea.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)